Tax Planning Is More Than Just Filing A Return
April 15th is Tax Day, isn’t that what people say? A once-a-year headache, and then you’re good till next year, right? No, not so fast. That’s just the day that you have to file a tax return to record your compliance with the rules of the Internal Revenue Service (IRS). The more important part is what you do throughout the year, and how your financial actions position you for the year. Proper tax planning involves conversations and decisions that go well beyond deadlines and filing requirements. Holistic thinking is key to maximizing the efficiency of your tax roadmap as you seek to reduce liabilities and unlock tax savings.
HighPoint Advisors, LLC helps individuals and families prepare for tax season with smart, sustainable financial strategies. Located in East Syracuse, NY and serving clients throughout Central New York and across the country, we provide professional guidance in wealth management, income and tax planning, holistic financial planning, and more. Our advisors work with clients to help them feel more informed and prepared during tax season each year.
Tax Preparation or Tax Planning?
Tax preparation is all about gathering up historical data and documents from the year that just passed and recording them with the IRS. How much income did you make, what deductions & credits do you have, etc.
Tax planning, however, is all about a forward-looking strategy. This proactive approach involves evaluating options and making informed decisions as the year progresses, with the goal of reducing future tax burdens while optimizing financial outcomes. A crucial aspect is realizing that some planning opportunities may only exist for a short period of time, and therefore careful coordination is important. Examples could include income timing, deductions, contributions, and credits, among others. Identifying and acting on these potential options is an area where financial advisors can add significant value.
Key Areas That Make a Difference
- Income Timing: There are many types of income: salary, bonus, commission, retirement distributions, stock compensation, pensions, and a business sale are some common forms. Deciding whether to realize income now, as opposed to deferring it into a future tax year, can make a big difference to your tax return.
- Retirement Account Contributions: Making pre-tax 401k/403b or IRA contributions will lower your taxable income today, whereas making after-tax Roth contributions to the same accounts will lower your taxable income later in your retirement years. Do you need the tax benefit today or tomorrow?
- Taxable (Non-Retirement) Investment Strategy: Not all investment returns in non-retirement accounts are taxed the same way. Interest, various forms of dividends, short-term capital gains, and long-term capital gains each involve different tax treatment. In addition, any realized capital losses can be used to offset various income in the current year. Deciding which investments belong in taxable accounts versus tax-advantaged accounts can help improve after-tax returns without changing your overall risk profile.
- Required Minimum Distributions: For those above the age of 73, the government requires that you withdrawal a certain minimum amount from qualified retirement accounts each year. Planning ahead for this could mean your income plan is not disrupted by these forced distributions that are taxed as ordinary income.
- Charitable Giving: Charitable intent and tax planning often go hand-in-hand. Using strategies such as Donor-Advised Funds, Qualified Charitable Distributions (QCDs), and donations of appreciated securities are all ways to carry out the support for causes you care about while also reducing your tax exposure.
- Business and Self-Employment: For those who are business owners or self-employed, tax planning may involve such things as deciding on an entity structure, evaluating retirement plan options, deduction & depreciation strategies, and estimated tax planning. These decisions can affect not only current cash flow, but also long-term
- Life Events: Tax planning for major events can be as stressful as planning for the events themselves. Planning ahead for such things as the birth of a child, job changes, marriage, inheritance, buying or selling a home, and starting a business can make a world of difference. That allows you to celebrate the event and avoid financial surprises.
- Estate Planning: Passing on wealth in a tax-efficient way is the key to preserving a lifetime worth of savings. With proper planning, you can leave your legacy intact for future generations.
Some Things to Keep in Mind
Tax planning is a team sport. CPA’s and tax accountants do the important work of keeping you in compliance with tax regulations, and financial advisors identify, plan & implement the financial strategies. When these professionals collaborate, the result may be a more comprehensive and better aligned plan for your long-term objectives. Individuals should share life changes as they happen, because sometimes there are interconnected tax implications that may arise out of a single event. Decisions in one area of your financial life can ripple into other areas.
Also, it’s important to point out that tax laws and filing rules change over time. Relying on a strategy that worked well in the past is not always the best way to plan for the future. Thus, it’s essential that you have regular review conversations with your advisor. You may be surprised to learn that there are new strategies available to you that you didn’t even know existed.
Make it an Ongoing Conversation
As you can now see, good tax planning isn’t a one-time event – it’s a continuous process that evolves as your financial situation changes. This type of holistic financial strategy should be a part of your ongoing financial life, and not seen as just a seasonal chore. By addressing tax considerations throughout the year, investors can make more informed decisions, reduce uncertainty and stress, and potentially keep more of what they earn.
Growing the net worth of our clients over time is a major goal for us at HighPoint Advisors, LLC. Our advisors have extensive experience collaborating with our clients and their tax professionals to achieve the most optimal outcomes each year. Changes to the tax and financial landscape varies year by year, so make sure you’re periodically talking with your advisor.
Contact us today, and let us know what’s changed in your financial life this year!
LPL Financial does not offer tax advice.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.