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Tax Planning

There are a wide variety of ways we help clients with tax planning and tax savings. As financial planners, we get to know our clients on a very personal and deep level. The information we collect from clients at the start of the relationship helps us make recommendations both in the financial plan, and through the years as we work with clients. Because taxation impacts nearly every financial decision, the list of strategies we recommend or utilize is too long to enumerate. Below are some of the most commonly used and impactful strategies we have recommended to clients.

Location Optimization

At the most basic level, location optimization means holding assets in accounts that are the most tax efficient for that asset type. Most commonly, this means holding assets that are more likely to produce capital gains and qualified dividends in taxable accounts (due to the lower tax rate on capital gains versus ordinary income) and assets that produce more ordinary income in tax sheltered accounts (IRAs, 401(k)s, etc.). However, we are often able to put a finer point on this for our clients. For example, even though we would typically recommend taxable accounts be more capital gains oriented, we may hold that asset inside a tax-sheltered account if we have reason to believe there is the potential for a very large gain on that asset.

We also work with clients to ensure they have the correct types of accounts to achieve their desired results. For example, we often recommend clients have a taxable account, a tax-deferred retirement account, and a Roth type account for flexibility purposes. We know that clients’ needs change over time and the same client may want to withdraw funds from an account while minimizing income taxes in the pre-retirement period, but also minimize RMDs in retirement. We can analyze your goals to recommend the correct types of account for you.

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Capital Gains Management and Tax Loss Harvesting

As investment managers providing custom portfolio management, we can carefully manage the tax implications of investment decisions. For assets in taxable accounts, we emphasize maximizing after-tax returns. Staying in close communication with our clients (and often their CPA/accountant) keeps us abreast of the client’s changing tax situation throughout the year and allows us to manage client assets more effectively.

We have extensive experience working with portfolios containing low-basis stock. Unlike some money managers who force everyone into the same cookie-cutter portfolios, we can manage portfolios containing these types of assets and custom design a portfolio that works with low-basis stock. We take the time to talk to clients about these investments up front, and we can typically find a solution that balances our clients’ desires for tax efficiency, diversification, and investment performance.

For clients in higher tax brackets, we often use municipal bonds for their tax advantages. Municipal bonds are free from federal taxes. Furthermore, municipal bonds issued in your home state are generally tax-free for state income taxes as well. It is critical that we closely monitor each clients’ income as the suitability of municipals depends on the client’s tax bracket each year. A close relationship with the client’s CPA enhances our ability to accurately make these decisions.

Lastly, we engage in tax-loss harvesting throughout the year to help manage our clients’ capital gains. Tax loss harvesting must be performed with attention paid to wash sale rules. Seemingly insignificant decisions such as dividend reinvestment can trigger a wash sale, compromising capital losses. While we never make investment decisions based solely on the tax implications, we look for opportunities to harvest tax losses when we can.

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Retirement Plan Selection

Retirement plan selection is perhaps the most effective way we can help our business owning clients save on their taxes. In certain situations, we have been able to save clients tens of thousands of dollars a year in taxes simply through retirement plan selection. Our financial planning team is well versed on all types of retirement plans and can weigh the various options against one another. Most often, business owners are looking for a plan that allows them to make larger pre-tax contributions allowing them to save aggressively and reap the tax benefits in the current year.

We have developed a relationship with a third-party administrator that is experienced in both plan design and plan compliance. Plan design refers to the specific way the plan document is written. The plan design aspect of the selection and implementation process is very important, but often overlooked. Skillful plan design has the potential to save the business owner just as much in taxes as plan selection.

Roth Conversion Planning

A Roth conversion is the process of converting pre-tax retirement savings (money in a traditional IRA for example) into after-tax (Roth) savings. The advantage to Roth savings is that withdrawals may be made tax-free and investment gains and income are not taxed (assuming the converted assets have met the five-year holding period requirement and the account owner has attained age 59 ½).   Furthermore, Roth IRAs are not subject to Required Minimum Distribution (RMD) rules during the lifetime of the owner. This gives the owner substantial flexibility in managing his or her income during retirement years.

Roth conversions can result in a large tax bill and will need to be planned for accordingly. The Tax Cuts and Jobs act of 2017 (TCJA) repealed the ability of taxpayers to recharacterize Roth conversions for tax years 2018-2025. The effects of this are two-fold. First, the inability to recharacterize a conversion has had the effect of increasing the “risk” of the strategy by eliminating the taxpayer’s ability to recharacterize the conversion in the event of a market downturn. Second, the revocation of this ability significantly increased the costs of a mistake in the conversion, which in the past could have been erased with a recharacterization. These two factors combine to make seeking the advice of a CERTIFIED FINANCIAL PLANNER™ even more important before making a Roth conversion decision.

A detailed financial plan can help identify years where a client is likely to be in a lower tax bracket, thereby increasing the efficacy of a conversion. Because we offer plan updates for existing management clients at no additional charge, we can continue to monitor a client’s tax situation and determine whether a Roth conversion is worthwhile.

Charitable Contribution Planning

For clients who are charitably inclined, there is a seemingly endless array of charitable gifting options which impact taxes. We can evaluate questions such as- “Should I gift cash or appreciated stock?” “Is a trust appropriate for my gifting plan?” “Is a Donor Advised Fund appropriate for me?” “What type of trust should I use?” or “Should I donate to a private foundation or a public charity?”

We are always looking for creative ways to help clients maximize the tax effectiveness of charitable gifts. For example, the TCJA increased the standard deduction creating a higher hurdle for taxpayers looking to itemize deductions. We can help clients analyze their giving and create a plan to “bunch” contributions together in order to itemize. Likewise, we’ll look at strategies such as Qualified Charitable Distributions, allowing clients to satisfy their RMD requirements without being taxed on those distributions.

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Estate Planning

Estate planning is a complex area of financial planning featuring a combination of legal issues and tax issues. For clients who are likely to face estate tax issues, proper planning has the potential to save the estate millions of dollars in taxes. Under current federal law (set to expire in 2026 if not renewed by Congress) however, most people will not have an estate tax issue. However, keep in mind that estate taxes are frequently a hot button political issue and the law is always subject to change. For this reason, estate planning is something that should be revisited frequently, even for those with more modest estates.

We have extensive experience working with clients and their estate attorneys to ensure that estate plans are properly implemented. One of the most common mistakes we see in the area of estate planning is doing the first few steps of the estate planning process but leaving some steps incomplete. A great example of this is having the trust document drafted by an attorney, but not properly funding the trust. We help clients review their estate plans regularly to ensure nothing falls through the cracks.

Keep in mind that although we have knowledge of the tax code and tax planning strategies, we are not accountants. Our clients have the most success from a tax planning and efficiency perspective when we work in conjunction with the client’s accountant. This helps inform our decisions as both investment managers and financial planners, which ultimately helps you as our client.