Tax Planning in Turbulent Times Part 3: Tax-Wise Financial Planning

Events

Tax-Planning Possibilities

You are launched in a great career opportunity

Enroll in and max out contributions to any tax-sheltered accounts such as a 401(k), 403(b), Cash Balance, Health Savings Account (HSA), Group Excess Liability and other perks.

You buy a home and start a family. 

Score extra tax deductions; strategize on mitigating the marriage penalty on tax returns, use pay down or restructure educational debt, contribute to an IRA, and/or establish a 529 plan account for your child.

You receive an executive compensation package.

Work with a fiduciary wealth advisor and tax professional to strategize on how and when to exercise your RSUs, Equity Options, Carried Interest and other opportunities for maximum wealth building and mitigating tax friction. Thinking through educational funding for those you love and consider developing a long-term charitable funding and giving plan, if appropriate, now is worth consideration. 

You receive a financial windfall, such as an inheritance. 

Allocate a significant portion of any new wealth to tax-sheltered retirement accounts. (Ditto for those executive compensation benefits.) Seek to offset taxable gains with any available losses or charitable contributions. 

You sell your first home and buy a bigger one.

Keep an eye on any gains from the sale. With some caveats, the Taxpayer Relief Act of 1997 says you can exclude up to $500,000 of the gain as a joint filer ($250,000 for single filers), add cost of investments and improvements into the cost basis. 

You transition to a new, lower-paying career, take a leave of absence from work or longer sabbatical, acquire additional education, or incur a financial setback. 

If your annual household income is taking a temporary hit, consider leveraging the lower tax bracket to reduce your lifetime taxes by harvesting capital gains, performing a Roth conversion, or step-up basis for existing securities. Health care cost considerations are to be reviewed and planned for. 

You buy a business. 

Engage a tax-wise professional fiduciary wealth manager to facilitate the acquisition, plan for tax efficiency, and mitigate unexpected risks by practicing asset protection. 

You send your 18-year-old to college.

Time to tap your tax-sheltered 529 plan and execute a well thought out educational funding plan. 

Your 18-year-old decides against college after all or receives merit or athletic scholarships.

Consider redirecting their 529 savings to a different beneficiary, withdrawing the assets and paying tax + 10% penalty if they do not attend or remove a like amount of dollars if award money is received, considering any anticipated graduate school needs to come. 

You monetize a business. 

Ideally, your well thought out succession plan has been in place for years prior, to position your business for a tax-efficient transfer and you to live your life as you choose and on your terms. Optimizing timing of payouts whether accelerating income or taking multi-year payouts should be considered depending on your circumstances. Targeted insurance may also help cover taxes without placing an undue burden on you, your partners, or your successors.

You transition away from full-time work.  

Plan how and when to maximize all sources of income, including performing a Social Security benefit analysis, analysis pension annuitization or lump-sum offerings, partnership payouts, accounting for other sources of income, as well as how and when to efficiently tap your taxable, tax-deferred, and tax-exempt assets. Once again, planning to pay the lowest lifetime taxes by adopting a purposeful and appropriate transitional tax plan to reduce your overall tax basis. Again, health care costs are to be considered and planned for. 

You downsize to smaller home. 

Again, mind your capital gains, as described above. If you’ve lived in the home for at least 2 years, you should again be able to exclude gains of up to $250,000/$500,000 per single/joint filer.

You decide to make work optional and still engage in part-time endeavors like consulting or joining boards.

Good for you! But do some tax projections to determine how the extra income may impact your tax rates, benefits, health care costs and your balance sheet’s bottom line. 

You are charitably inclined. 

To the extent you are charitable, we helped you magnify those gifts and make them even more impactful. Design and Build a Giving Plan leveraging the tax code and maximizing your impact in the community you care about. It can use well-timed giving of highly appreciated securities, collectables, real estate or other property to offset unusual taxable events, such as leveraging a Donor-Advised Fund in the same year you exercise a taxable stock option, sell a highly appreciated asset, or incur other significant income.

You incur significant healthcare costs. 

Speaking of deductible expenses, you may be able to bundle high-priced elective procedures into a single year, to take more than your standard deduction that year (especially if you pair it with bundled charitable giving). Or, if you’re not seeking a higher deduction, this may be a good time to tap tax-free assets in your HSA.

You wish to taking care of your heirs while defining legacy.

The taxable implications of estate planning are extensive, and best addressed with a fiduciary wealth manager and estate planning attorney. Especially since the 2020 SECURE Act eliminated the stretch IRA, you may also want to assess whether you’d rather prioritize reducing your own lifetime taxes or those of your heirs, and proceed accordingly.