Taxes are often thought about as a once-per-year sprint to file by April 15, but taxes play a much bigger role in your life than that. Taxes touch every aspect of your financial plan from how you save to how you invest to how you spend money. 

All of your financial decisions have tax consequences, making it important to work with a team that specializes in these tax nuances to help create a plan that sets you up to reach your goals.

Today, our team would like to talk about the importance of proactive tax planning as part of a strategic and strong financial plan. We love the opportunity to educate our clients on this topic. 

First, we’ll explain tax planning and how it differs from tax preparation. Next, we’ll describe how tax planning can impact your overall financial picture. Finally, we’ll share examples of how we include tax planning as a key part of our services to reduce your tax burden next April and well into the future.

What is Tax Planning?

First, let’s distinguish tax planning from tax preparation. Tax preparation is the process of gathering your financial documents (1099’s, W-2’s, etc.) each year and working with a CPA to file your taxes. 

Your tax professional will be able to advise you on basic filing strategies and deductions but won’t have the time to look at your finances from a more comprehensive lens. Tax preparation professionals receive your data after your tax year events have occurred, leaving little room to make proactive choices. In tax preparation, accuracy and efficiency take precedence.  

Tax planning, on the other hand, is a long term strategic approach to minimizing your tax liability each year so the taxes you pay over your lifetime are as low as possible. Your financial advisor has the benefit of understanding your entire financial picture and is positioned to advise you throughout the calendar year. 

Through proactive tax planning, we perform an analysis of your planned actions for a given year such as charitable gifts, the purchase or sale of real estate, rebalancing your portfolio, retirement savings vehicles and walk you through the short- and long-term tax consequences of those choices.

With a strong tax planning strategy, you will have more confidence come tax time because you will know what to expect. As your financial advisor team, our job is to complete strategic analyses of your entire financial picture and come up with creative, practical, informed options that will help you make the best decisions for you and your family. 

What Taxable Events Impact Your Finances?

As we mentioned earlier, taxes impact nearly every aspect of your financial landscape. When you are able to approach your finances from a tax lens, you are able to make better choices that will have a significant impact on not only your tax bill but also your entire financial strategy. 

It may surprise you how many spots in your financial record are impacted by taxes.

Capital gains and losses in investments
Tax-loss harvesting
Asset allocation (creating your investment portfolio with a specific division of asset classes)
Asset location (determining the tax-efficiency of each asset and its corresponding account)
Charitable giving
Roth Conversions
RMD strategies in retirement
Social Security planning
Healthcare/Medicare premiums

This list is just a snapshot of the many ways taxes can influence your financial progress. Our team looks at your financial picture from this comprehensive lens which allows us to recommend the best way to set up, manage, and distribute your wealth. 

As your financial advisor, our goal is to reduce your tax burden and enhance your overall financial plan, leaving you with more money in your pocket.

How we Integrate Tax Panning Into Our Financial Planning Process

Now that you’ve got an understanding of tax planning and how taxes impact your financial plan, let’s give some specific examples of how we integrate proactive tax planning into our financial planning process. 

As mentioned above, your financial advisor has a big-picture view of your assets and liabilities, your life circumstances today and what changes you may foresee in the coming years. 

With this data, we build projections that demonstrate how choices made today are likely to impact your future financial situation. When we sit down to review options, we explain the pros and cons of the choices in front of you, including optimal times to buy and sell assets or investments, for example.

Tax Planning For Younger Individuals and Couples 

Some of our younger clients ask us for guidance to plan for a wedding and/or for a first home purchase. We can advise them on the ideal climate and timing to make those large purchases, and where they may benefit from tax credits or deductions. Generally speaking, the prime earning years are the higher tax bracket years where tax breaks can aid you the most. 

On a related note, younger people tend to be more mobile and may experience job changes which could lead to more frequent real estate transactions. 

We ensure that our younger clients realize the benefit of holding primary residence real estate for at least two years; in many cases, this avoids the need to pay capital gains on sale profits up to $500,000 for a couple. What’s more, some homebuyers may qualify for a penalty-free withdrawal from a 401k or IRA to fund a first home purchase. 

On Asset Allocation and Retirement Planning.

How you choose to allocate your investable assets impacts your tax situation. Your 401(k) or IRA accounts, for example, are prime examples of where we can plan ahead for a tax-efficient withdrawal system for you during retirement. There are a host of options that come with different tax implications, such as Roth IRA conversions, Medicare premiums, and Social Security integration. As well, required minimum distributions (RMDs) from retirement accounts can raise your taxable income each year.

Tax Considerations With Legacy Planning

If you have children or other designated heirs, we’ll discuss estate planning and review current tax laws that impact your heirs’ tax burden. For example, inherited assets from a Roth IRA come with different tax rules than those in a Traditional IRA. 

Especially since the recent passage of the SECURE Act, it’s crucial to plan ahead to minimize the tax liability faced by your heirs. In addition, we will keep you current on the annual monetary limits of tax-free cash gifts to your children while you are still living.

How Blue Rock Can Help

As you can see, there are numerous areas where proactive tax planning impacts your financial future and merits a long term relationship with your financial advisor team. 

Whether your financial situation is simple or complex, at Blue Rock we endeavor to add tremendous value to the relationship we have with you through proactive and strategic tax planning. You can count on our commitment to deliver you a solid and strong financial plan so you can relax knowing your money is working on your behalf.

To get the ball rolling, schedule a conversation with us today or call us at 302-660-3350. We look forward to getting to know you.