Taxes are one of the largest drains on any executive’s financial progress. The more you make, the more you pay. But there are opportunities to mitigate that and keep more of your hard-earned money in YOUR pocket, not Uncle Sam’s… Enter Tax Planning.
So what is Tax Planning?
Tax planning involves analyzing your current situation along with any decisions or events, then taking a series of preemptive actions during the year to minimize the amount of your income that you pay to the IRS.
Wait! Doesn’t my CPA do that?
Actually, the overwhelming majority of CPAs focus on ‘Tax Filing’. Your CPA uses their in-depth understanding of the tax code to look for opportunities to claim deductions and credits AFTER the year has closed. Tax filing is a rear-view process. It’s backward looking and reacts to actions you’ve ALREADY TAKEN.
Tax Planning is Proactive.
Tax planning is a forward-looking and proactive process. Tax planning looks forward to see what decisions and opportunities are coming up and takes proactive action to reduce the impact of taxes. Think of it as helping you make Tax Smart Decisions while in the decision-making process, not after it’s already done.
Think of it like driving a car.
Tax filing is looking in the rear-view mirror at that HUGE pothole you just ran over. You blew out a tire, dented your rim and have costly body damage. Your CPA works hard to find the best option to repair the damage done to your car after the fact. In contrast, tax planning is like a driver looking through the windshield to observe the road ahead, SEES the pothole and makes an informed decision to AVOID the pothole and take a less damaging (and less costly) route.
With proactive tax planning, you have the opportunity to make changes during the year that lower your AGI. When you’re about to file your tax return, it’s too late to adjust your income because the tax year is already behind you. But if you plan ahead and understand what strategies are available for reducing taxes owed, you can earn tax breaks today and in the future.
So how often do you do tax planning?
While tax filing normally only occurs in the spring, tax planning is more of a year-round matter depending on your situation and the strategies being implemented. Depending on the types of compensation and stock events, decisions, or life changes pending for the year, we perform a scenario analysis and plot out the pros/cons, along with the costs of each path so you can make tax smart decisions that work for you. We have yet to meet a client that WANTED to pay more in taxes. Sometimes just knowing your options is half the battle.
Examples Please.
Tax planning strategies include things like reducing the amount of income eligible to be taxed, controlling timing of when income is taxed, timing and structure of purchases and expenses, tax deductions, and taking advantage of tax credits.
Basic examples include:
- Determining how much to withhold in taxes from your pay
- How to structure employer withholdings on your W4
- How much to contribute to your 401(k)
- How much to contribute to your HSA and benefits
- Whether or not you should contribute to an IRA
In more complex scenarios, tax planning can have an even greater impact:
- Timing the purchase or sale of a primary home
- When/how/if to pull money out of IRA to invest in real estate
- When and how to exercise stock options
- Forecasting total taxes due from annual vesting stock or cash award programs so we can take offsetting actions (bunching deduction generating activities, gain-loss harvesting, or charitable gifting for example)
- When to recognize medical or other expenses so you get maximum tax deduction
- Forecasting liquidity events like IPOs
- Structuring inheritance to minimize taxes
- How and when to make major purchases
- How and when to sell real estate
- Whether advanced real estate strategies make sense – tax-free exchange (1031), Delaware Statutory Trusts, or Deferred Sales Trust
- Forecasting future estate tax based on asset growth so we have time to implement offsetting mitigation strategies without running afoul of look-back periods
- Staggered Roth Conversions and Mega Backdoor Roths
- Asset location – in what account to purchase & hold high growth assets vs. taxable income generating assets
- Donor Advised Funds and other advanced gifting strategies
Saving on taxes today helps to build your tomorrow. The compound effect of keeping more in your pocket and funding YOUR goals only builds over time. It’s exponential. So let’s get started!