If you don't have a tax plan, chances are you're seriously diluting your hard-earned assets over time. Tax planning is one of the most important—and most neglected—tools of wealth building.
While it’s critical most every year, if you want to reduce taxes, planning is especially important after the tax reform of 2018. With 2018 returns in hand, you are likely feeling either serious pain or joy from the reform’s changes. Either way, it’s time to get serious about putting a proactive game plan in place. This law is not permanent (various components expire in 2023 and 2025), so acting now—between April and September—should help you minimize your tax liability for at least the next five tax years.
First, a quick review. If you fall into one of these groups, chances are high you were significantly impacted on your 2018 returns, and barring any major changes to your financial picture, you will be impacted similarly for the next several years.
- You Itemize Deductions: A big boost to the standard deduction means many of the previous items you itemized may no longer be allowed.
- You Own a Business: Business owners with pass-through income (Schedule Cs, LLCs, S-Corps) could potentially qualify for a whopping 20% tax deduction.
- You Earn $200K+ per Year: High-income earners will experience the two-sided coin of lower tax rates (yay!) plus fewer deductions (boo!). Planning, my friend.
If you don't fall into one of these groups, you could still see some shifts, so don't neglect planning just because your situation doesn't fit neatly into one of those buckets.
Now, onto the key tax-whittling strategies.
11 Key Elements of an Effective Tax Management Plan
Following are the key elements to include in your tax plan that can help you work toward the largest possible tax savings.
- Assemble Your Team: It’s important to have an advisor knowledgeable in tax law and current tax-law changes who is also a proactive tax planner. If your CPA is also a strategic tax planner, he or she is a great fit. If not, a CERTIFIED FINANCIAL PLANNERTM (CFP®) is the perfect advisor to bring on board.
- Review Last Year’s Return Line by Line: Once your tax advisor wraps last year's returns, it's time to get to work with your tax-planning team. Your advisor should conduct a line-by-line review of your latest tax returns to identify every savings opportunity available. This is especially important this year. Even if your income and expenses remained the same from 2017 to 2018, with all the tax law changes, your returns could show significant changes in your tax bill.
- Business Owners: If you're a business owner, your advisor needs to thoroughly review both your personal and your business returns from last year.
- Create a Holistic Tax Plan: With inefficiencies highlighted, it’s time to make a plan. An effective tax plan should encompass every area of your financial life. It will bridge your investments, income, business structures, retirement plan, charitable giving, estate plan, and more. Whether you're working with a CPA or CFP®, they should pull in everything, no matter how simple or complex your situation.
- Create or Update Your Plan Between April and September: Aim to complete your plan before the end of September. This will help you maximize your savings by implementing any changes during the year rather than playing catchup in November/December.
- Coordinate Tax Planning with All of Your Advisors: Most of us take full advantage of the tax deductions we know about. The problem often lies in the gaps between our tax, financial, and legal work. Without a coordinated team of advisors, you could unknowingly make financial or legal decisions that create a negative tax burden. A good CFP® will be that main point of contact who acts as your head coach and coordinates the whole team.
- Manage Your Investment Taxes: Investment income is the most heavily taxed part of most investors' financial plans. You'd be surprised how often we find new client's portfolios are over-taxed. Part of our investment strategy includes reallocating highly taxed investments to more tax-efficient accounts with the same return objectives.
- Business Owners, Change Your Retirement Plan to Fit Your Business: I'm not exaggerating when I say that we've seen business owners save up to $200,000 in taxes by merely changing their retirement plan. Small business owners have more complex tax pictures and, therefore, substantially more savings opportunities. We find that benefit plans, retirement plans, and life insurance offer business owners potentially significant savings.
- Incorporate Current Tax-Law Changes: The tax code actually changes every year—some years much more significantly than others. Your strategic tax planner should review your entire financial picture in light of the most recent changes. This can help maximize your savings for the current year—rather than playing catchup next year.
- Don’t Rely on Your Neighbor’s Advice: The tax bill is more than 1,000 pages thick and contains many ultra-specific inclusions and exclusions. I've been telling clients: With all the specific details, chances are high that the plan to save taxes for your neighbor—who lives in the same neighborhood, with the same house value, and who makes comparable money—won't apply to you. It's imperative you have a personal tax plan.
- Get Savvy Before Retirement: Planning becomes especially important as you near retirement. If you're three to five years away from your goal retirement date, plan now. This is the time when most investors are earning the highest income of their lives, and lack of planning can result in additional taxes instead of stocking up income for retirement.
We hope you see the benefit of a proactive tax plan. It's an underused tool that can help you plan, build, and preserve your wealth.
Now, get planning!
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Categories: Tax Planning, Tax Strategies, Tax Management, Tax Minimization, Charitable Giving Strategies
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. The examples used are hypothetical and are not representative of any specific investment. Your results may vary.