The due date for filing individual tax returns in the U.S. is this week.  Due to a lengthy and complex tax code many tax payers are unaware of steps they can take to manage their tax bills.  For many, the only thought given to income taxes is when it is time to prepare a tax return.  By then it is generally too late to take steps to manage the tax bill.

This is when you can see the importance of tax planning as an area of focus in your financial plan. Here are some of the areas of your financial plan that incorporate tax planning:

  • Income planning

    • Income is generally taxed when you receive it. We look at the pros and cons of deferring some income until a time when you may be in a lower tax bracket.
    • Capital gain income is generally taxed at a lower rate than ordinary income. We look to manage the balance of income types.
    • Having diverse sources of income can allow the ability to draw non-taxable income in retirement.  This can be a useful way to manage not only your tax bill but also other expenses such as your Medicare premium.
    • Planning for income resulting from stock options, grants or restricted stock requires the correct timing of stock sales in order to minimize your tax liability.
  • Charitable giving

    • Donations to qualifying charities can reduce your tax bill while accomplishing your philanthropic goals.
    • Certain donations to charities directly from individual retirement accounts may not only manage your tax bill but may also help manage your Medicare premium.
    • Donations of appreciated stock may help manage your portfolio allocation and your tax bill while meeting your philanthropic goals.
  • Retirement planning

    • Taxes will be one of the largest expenses during retirement years.
    • Appropriate use of retirement plans may allow more of your wealth to grow until you need it in retirement.
    • Proper planning is necessary for those retiring early to avoid incurring unnecessary taxes and penalties.
  • Estate planning

    • Avoiding taxes to leave more of your wealth to be distributed according to your wishes is one of the primary purposes of estate planning.
  • Cash flow planning

    • Avoiding early distributions of retirement accounts may save you significant tax and penalties.
    • Anticipating cash flow needs for taxes may allow you to avoid liquidating investments at inopportune times.
  • Investment planning

    • Timing the sale of appreciated investments could mean the difference between paying taxes at short-term capital gains rates or the lower long-term capital gains rates.
    • Asset location is whether an asset is in a taxable account or in an account where it may have tax-deferred or tax-free growth.  This can have significant impacts on your current tax bill and future portfolio growth.
  • Business planning

    • The types of income generated by a business for an owner may be taxed differently. We strive to balance tax implications with overall business and personal goals.
    • Retirement plans for small businesses serve to allow the business owner to plan for retirement but can also serve as recruitment tools for top talent.
  • Planning around life events

    • Appropriate timing of transactions close to marriage or divorce can minimize tax effects.
    • Understanding the effect that a new child in the family will have on your taxes helps with cash flow planning. It may allow you to use any tax savings for other needs such as education savings.
    • It is also important to understand the effect of a child becoming independent and no longer being claimed on your tax return.
    • While paying off a mortgage is liberating, it is important to realize the effect that the mortgage interest deduction had on your taxes.
    • An inheritance can present some tax challenges that require additional planning.

Taxes affect all areas of your financial plan. Without having a comprehensive financial plan it is difficult to have an effective and appropriate plan for managing your taxes.  As a result of the process of preparing a tax return, you have all of your financial documents handy and organized.  You can see your income for the year on your tax return.  You can also see what you pay in income tax.  As I’m sure you have heard, there have recently been significant changes to tax laws.  This is a great time to seek help from your adviser to ensure that you are doing all that you can to keep more of what you make and pursue your financial goals.