“If a window of opportunity appears, don’t pull down the shade.” Tom Peters quoted that line in reference to business management practices; however, it is particularly relevant when it comes to tax planning. Planning for the current tax year is a very important part of the wealth-management process; however, long-term tax planning, which goes beyond the current year, is critical in minimizing your lifetime tax burden and enhancing your overall wealth. At HCM, your advisor and our tax planning team will highlight opportunities that exist for you, allowing you to choose which, if any, you’d like to pursue. Here are some common strategies that often benefit HCM clients.
Lower Rates on Long-Term Gains and Qualified Dividends
How great would it be to have the same money to spend each year, while reducing your taxes at the same time? You may be able to accomplish this by simply changing how you take your spending money. Sales of appreciated stock and real estate as well as dividends from most companies (from non-exempt accounts) are taxed at rates well below (usually about half) your normal rate. Effective tax planning can uncover if there is a chance this may exist for you, and your advisor can walk you through how to take advantage of it.
Tax Loss Harvesting
The tax code allows you to take a limited amount of capital losses and reduce your ordinary income by that amount. If you are in a higher tax bracket, this makes sense. HCM routinely evaluates opportunities with respect to tax loss harvesting for clients with brokerage accounts.
Roth IRA Conversions
Traditional IRA distributions are taxed as ordinary income whereas Roth IRA distributions are tax free, provided you’ve met the 5-year holding rule and are over 59.5 years old. A tax strategy utilized by many HCM clients is to convert those traditional IRA dollars into Roth IRA dollars. You will pay taxes in the year of conversion, which depending on your tax bracket could be at a very reasonable rate, and allow that money to grow tax free and not be subject to required distributions from the traditional IRA when you are in your 70’s. Added bonus – distributions from beneficiaries of a Roth IRA are also tax free, eliminating a tax liability for your heirs on those funds.
Avoiding an Underpayment Penalty
When working, most people have taxes automatically taken out of their wages which puts them in good graces with the IRS. In retirement, your tax liability can fluctuate more, which requires planning to ensure you have paid enough taxes through the year to avoid a penalty if you owe too large of a liability come tax time.Your HCM advisor can run a projection for the tax year to help determine if you will need to pay additional amounts to avoid this penalty.
Avoiding Medicare Premium Increases
If you make over an IRS prescribed income limit, and are Medicare eligible, you could face an Income Related Monthly Adjustment Amount, or IRMAA. Said differently, too much taxable income could result in increased Medicare premiums. Tax planning is one way to uncover how close to those income limits you are likely to be for the year, allowing you to adjust accordingly if you are able and willing to do so.
Conclusion
There are many more topics in this arena such as charitable gifting, legacy planning, Social Security benefit timing, etc. that we consider related to your overall financial health. Tax planning is a critical component of a well-oiled financial plan. Our tax planning methods often provide very tangible benefits not just for the year in question, but for years down the road. Taxes, and the associated planning around them, remain of paramount importance to HCM. In a world where the payment of taxes is a certainty for most, our goal is to be as purposeful and efficient with what you have worked so hard to achieve, and proper tax planning helps us do just that.