Weaving Tax Planning Into the Fabric of Your Life

Managing for tax-efficient investing is just one way we help families reduce their lifetime taxes. We also help integrate all of the tools from the previous posts into your broad financial interests. Following are just a few life events that can pose potential tax-planning challenges and opportunities:

Events Tax-Planning Possibilities
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; use the savings to pay down college debt, contribute to an IRA, 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 says you can exclude up to $500,000 of the gain as a joint filer ($250,000 for single filers).
You transition to a new, lower-paying career, take a leave of absence from work 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. Time to 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 have grown tax-free for years).
You sell a business. Ideally, your succession plan has been in place for years before positioning your business for a tax-efficient transfer. Targeted insurance may also help cover taxes without placing an undue burden on you, your partners, or 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 a smaller home. Again, mind your capital gains, as described above. If you’ve lived in the home for at least two years, you should be able to exclude gains of up to $250,000/$500,000 per single/joint filer.
You decide to work part-time in retirement. Good for you! But do some tax projections to determine how the extra income may impact your tax rates, benefits, and bottom line.
You are charitably inclined. Even with the 2017 Tax Cuts and Jobs Act tax code changes, tax breaks remain for the philanthropically minded. For example, you can use 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 high 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 an excellent 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 you’d rather prioritize reducing your own lifetime taxes or those of your heirs and proceed accordingly.

The Big Picture

The above scenarios represent only a handful of the tax-planning events you might encounter throughout your life. Whether you’re building, preserving, or spending your wealth, tax planning remains integral every step of the way. Each financial move you make can and should be leveraged for tax efficiencies as described. Better still, a seasoned tax-planning professional 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.

Could you use an experienced hand to keep your total wealth at play? We’re here to help!

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for returns and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources we believe to be reliable. However, some or all information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes  only  to  reflect  the  current  market  environment;  no  index  is  a directly  tradable investment.  There  may  be  instances  when  consultant  opinions  regarding any fundamental or quantitative analysis do not agree.

The  commentary  contained  herein  has  been  compiled  by  W.  Reid Culp,  III  from  sources  provided  by  TAGStone  Capital,  as well  as  commentary  provided  by  Mr.  Culp,  personally,  and  information independently  obtained  by  Mr.  Culp.  The  pronoun  “we,”  as  used  herein,  references collectively the sources noted above.

TAGStone Capital, Inc. provides this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult your advisor from TAGStone or others for investment advice regarding your own situation.