December 16, 2021

Tax Planning in Turbulent Times Part 3: Financial Planning

In our last two pieces, we covered some tools of the tax-planning trade, as well as how to deploy them for tax-efficient investing.
But tax planning is not just for your investments. Life happens, often unpredictably. We are here to help weave even unexpected events into the tax-planning fabric of your financial life.

Challenges and Opportunities

Here are just a few life events you may encounter over time. Each can translate into tax-planning challenges and opportunities:

  • You get a job: Enroll in and max out contributions to any tax-sheltered accounts such as a 401(k) or Health Savings Account (HSA).

  • You buy a home and start a family: Score extra tax deductions and use the savings to pay down college debt, contribute to an IRA, and/or establish a 529 plan account for your child.

  • You receive an executive compensation package: Work with a financial planner or tax professional to determine how and when to exercise your options for maximum tax-efficiency.

  • 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.

  • 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 allows you to exclude up to $500,000 of the gain as a joint filer ($250,000 for single filers).

  • Your pay is reduced or you take a leave of absence or incur a financial setback: If your annual income is taking a temporary hit, consider leveraging the lower tax bracket to reduce your lifetime taxes by harvesting capital gains or performing a Roth conversion.

  • You buy a business: Engage a tax-wise professional financial planner to facilitate the acquisition.

  • You send your 18-year-old to college: Tap their tax-sheltered 529 plan. Adjusting your income levels through practical tax planning may also help secure a more favorable student aid package.

  • Your 18-year-old decides against college after all: Consider redirecting their 529 savings to a different beneficiary, or withdrawing the assets and paying tax + 10% penalty (which may not be so bad if the assets grew tax-free for years).

  • You sell a business: Ideally, your succession plan is well-established and positions your business for a tax-efficient transfer. Targeted insurance may also help cover taxes without placing an undue burden on you, your partners, or your successors.

  • You retire: Plan how and when to take Social Security and any pension benefits available, as well as how and when to tap your taxable and tax-sheltered accounts. Once again, during low-income years, you may also plan to engage in some tax-gain harvesting, to reduce your overall tax basis.

  • You downsize to smaller home: Again, mind your capital gains, as described above. If you have 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 work part-time in retirement: Perform tax projections to help determine how the extra income may impact your tax rates, benefits, and bottom line.

  • You are charitably inclined: Take advantage of tax breaks with well-timed giving to offset unusual taxable events, such as setting up a Donor-Advised Fund in the same year you exercise a taxable stock option, sell a highly appreciated asset, or incur other significant deductible expenses.

  • 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 are not seeking a higher deduction, this may be a good time to tap tax-free assets in your HSA.

  • You prepare to pass your wealth on to heirs or other beneficiaries: The taxable implications of estate planning are extensive, and best addressed with a financial planner and estate planning attorney. Especially since the 2020 SECURE Act eliminated the stretch IRA, you may also want to assess whether to prioritize reducing your own lifetime taxes or those of your heirs, and proceed accordingly.

We're Here to Help

The above scenarios represent only a handful of the tax-planning events you might encounter throughout your life. Whether you are building, preserving, or spending your wealth, tax-planning remains integral every step of the way. Each financial move you make can be leveraged for tax efficiencies. Better still, your M&S Tax Advisor can combine these parts into an integrated whole as you pursue lifelong tax efficiency.
Put another way, ideal tax planning integrates seamlessly with all your greater financial plans. This can get complicated—like a juggling act, in which we must keep an eye on each item as well as the big-picture results. Let us help, reach out today!