HOW TO FIND PLANNING OPPORTUNITIES ON YOUR TAX RETURN

Falcon Wealth Advisors ?Co-Founder and Wealth Advisor?Cory Bittner, CRPC?,?recently hosted?Upticks , where he was joined by?Joe Ibarra, CPA, a Financial Planner on our team. They discussed one of the more common questions clients ask our team: “How can I pay less money in taxes?” While we’re not accountants and aren’t aiming to replace our clients’ accountants, tax planning is one of the key services we offer. In this episode, Cory and Joe spoke about how proactive tax planning is an important part of our Signature Planning Process. A summary of their conversation is below.

Cory:?To kick off our conversation, can you talk about how we tax plan for our clients, including using the software?Holistiplan ?

Joe:?Sure, Holistiplan provides us an impressive level of detail, as it analyzes a client’s tax return and produces a report that summarizes the previous tax year and flags areas of opportunity to reduce a client’s tax burden. For example, the report may suggest executing a?Roth conversion ?or realizing capital gains.

Holistiplan can also help us model future tax years. And as the tax code changes, the software can even project how those changes would impact a client’s tax situation.?

We encourage clients to send us their 2022 tax returns as soon as they have them so that we can use Holistaplan to identify tax-smart tactics to pursue as 2023 progresses.

Cory:?As a CPA, Joe, can you talk about how you have found Holstiplan to be most useful for clients?

Joe:?In the short term, we’re able to quickly help a?Falcon Wealth Advisors ?client make decisions on topics like whether to invest in a Roth or a pretax IRA, or if they should pursue a Roth conversion. Holistaplan offers us really specific insights we can use in the short-term financial and tax planning process.

But we can also use that information to extrapolate and see how tax-smart strategies will continue to have a positive impact on your financial plan. As?financial planners , we focus not just on this year but on a client’s long-term tax situation.

Cory:?Yes, these decisions aren’t made in a vacuum and the tax code can change from year to year. That’s why it’s so important to regularly review how your investments and income affect your tax situation, and that’s something we do when we meet with clients at least once a year.

Joe, if a client sends you their tax return today and you scan it into Holistaplan, what specifically are you looking for?

Joe:?The first thing we’re going to do at?Falcon Wealth Advisors ?is look at taxable income. This number is key because it determines so many other things. It can impact how much a retiree pays for Medicare, for example. Once we know your taxable income, we’re able to begin exploring relevant strategic planning opportunities.

Cory:?And once you have that number, how do you explain to a client what their tax bracket is, as well as their marginal tax rate and average tax rate?

Joe:?The tax brackets in America are tiered, and the more money you make, the higher percentage of tax you pay on those dollars. After the 12% bracket, the rate in the next bracket jumps to 22%. But that doesn’t mean?all?of your dollars are taxed at 22%. Only the dollars that fall into a specific bracket get taxed at that rate. If you’re just barely in a higher tax bracket, only that income that pushed you there will be taxed at the higher rate.

This is where the term marginal tax rate comes from. Marginal tax rate is the tax rate associated with each additional new dollar in the highest tax bracket you’re in. If you’re in a high tax bracket, it becomes important to try to reduce your taxable income, because you’re saving yourself from that high marginal bracket. If you’re in a lower tax bracket, you may want to see how you can take advantage of that by pursuing, for example, a Roth conversion.

Separately, average tax rate is calculated simply by taking the total amount you paid in taxes divided by your total income. This number will be?lower?than your marginal rate. Again, it’s important to know that just because you’re in the 22% tax bracket, for example, not?all?of your money will be taxed at that rate. Average tax rate is more of a blended rate, if you will.

Cory:?To give a real world example, I recently met with a client and was looking at their tax year 2021 report. This client was in the marginal 22% tax bracket but their average tax rate was just below 11%. This average tax rate is the number that’s most important to a client’s financial plan.

Let’s now talk about tax withholdings. What opportunities do they present for clients?

Joe:?As an example, let’s imagine a retired couple who are receiving distributions from their pretax traditional IRA. Withdrawals from pretax traditional IRAs are considered ordinary income and you have to pay taxes on these withdrawals as you make them. That’s why we help clients in this situation set aside money for taxes, and we aim to help them set aside the right amount—not too much and not too little. We want to leave as much money in their portfolio as possible, so that it can continue to fuel their financial plan.

Cory:?Yes, I think some people treat the IRS as a forced savings mechanism. But by doing so, they’re giving the government an interest free loan with money that could have been invested. A tax refund is?your?money. If you’re withdrawing $50,000 from an IRA each year but you get a $5,000 tax refund, you’re actually spending $55,000 a year from your IRA. Withdrawals impact both your taxes and your long-term financial plan.

Joe, let’s talk about the?Net Investment Income Tax ?and?Income Related Monthly Adjusted Amount ?(IRMAA) surcharge.

Joe:?Yes, we’ve mostly talked about ordinary income tax brackets and ordinary income tax rates. But the capital gains tax rate is also very relevant for our clients. It has only three brackets: 0%, 15% for most people, and 20% at the high end. These rates are generally lower than ordinary income taxes. But if your capital gains taxes are high, you may also be subject to the Net Investment Income Tax of 3.8%. Holistiplan is helpful because it can highlight if an action, like a Roth conversion, could trigger that Net Investment Income Tax.

With the help of this software, we’re able to look at your entire tax situation, and not just your ordinary income tax exposure. This includes examining how a client’s withdrawals and income will impact what they pay for Medicare. If your income is high enough, you may have to pay the IRMAA surcharge on your Medicare premiums. We can also use Holstiplan and our?tax planning ?capabilities to plan for and potentially avoid IRMAA. To again use the example of a Roth conversion, we can help you determine if the benefits of a Roth conversion outweigh it potentially triggering the IRMAA surcharge.

Cory:?That’s well said. I hope we’ve shown there are a lot of tax planning opportunities and this time of year is a good one for us to scan your 2022 tax return into Holistiplan so that we can plan for tax year 2023. If you’re a client who wants to make sure we have your most updated tax return, or if you want to learn more about how our tax planning capabilities separate us from other wealth advisors, please contact?Falcon Wealth Advisors ?today. You can reach me directly at?[email protected] .

Clients choose to work with us to enhance their financial literacy and explain exactly what?their?financial plan means to?them.

Hightower Advisors, LLC is an SEC registered investment adviser. Securities are offered through Hightower Securities, LLC member FINRA and SIPC. Hightower Advisors, LLC or any of its affiliates do not provide tax or legal advice. This material is not intended or written to provide and should not be relied upon or used as a substitute for tax or legal advice. Information contained herein does not consider an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Clients are urged to consult their tax or legal advisor for related questions.