TAX TIME IS HERE—NOW WHAT?

As tax day approaches,?Falcon Wealth Advisors?Financial Planner?Jake Cross, CFP?,?joined Cory on?Upticks?to discuss what clients should be thinking about in regards to tax planning and financial planning. They also detail concrete steps people can take today to improve their tax situation in the future. A summary of their conversation is below.

Cory:?Thanks for joining me, Jake. What are the most important pieces of information people should look for when they’re reviewing their tax returns?

Jake:?This is somewhat difficult to answer, as everyone’s tax return and tax situation is different. People have different jobs and sources of income, of course. I think two numbers to be aware of are your marginal tax bracket and effective tax rate. The effective tax rate is the percentage of tax owed based on your taxable income, while your marginal tax bracket is at what your next dollar of income would be taxed. We can use this information, and a client’s entire tax return to try to project what their tax situation will be in the coming years.

These numbers can also help us and a client work together to determine if they should contribute to a Roth IRA or a pretax IRA, for example, or if they should pursue a?Roth conversion.

Cory:?Anyone who has viewed a?tax return?knows it contains a lot of information that isn’t easy to decipher. How can someone find their effective tax rate and their marginal tax bracket?

Jake:?If you work with an accountant, they can often provide you a summary that includes these numbers, as can our tax planning software at?Falcon Wealth Advisors. Tax returns can range from a few pages to many, so it’s important to work with an accountant and a fiduciary wealth advisor to review them. You’ll want to look at your return every year so you can make projections for moving forward.

Cory:?Yes, this tax review should be done on an annual basis. You shouldn’t assume your tax situation is what it is and will stay that way forever, because both your life and the tax code change regularly. One year it may make sense to contribute more dollars to your pretax 401(k) account and the next it may be prudent to focus on Roth contributions. You can’t make informed decisions if you don’t annually review your tax return. And there are of course a number of variables for retired people to navigate, including withholding dollars for paying taxes on pretax IRA withdrawals, as well as taxes on pensions and Social Security benefits.

This is a good time of year to be proactive about tax planning for the rest of 2023. Jake, should someone want a large or small refund?

Jake:?In an ideal world, your tax return would be $0. That means you didn’t pay the government too much or too little throughout the year. In regards to refunds, if you get back a large refund, that means you made the government an interest free loan in the previous year. And of course no one enjoys owing money, either. If you do expect you will owe a significant amount, talk to your fiduciary wealth advisor about your options. Perhaps you could buy bonds that mature around the same time you have to pay your taxes, which could lessen the financial blow.

Cory:?Well said. From our perspective, a big refund or owing the government a large amount stems from failing to adequately tax plan. If you do have a large refund or owe a lot, take the opportunity to explore why. If you’re retired, perhaps you’re withholding too much or too little for taxes on dollars from your pretax IRA, for example. As part of our tax planning process at?Falcon Wealth Advisors, we help clients evaluate tax situations like this all the time.

Jake, I know you’ve been working with the financial planning group to map out what tax planning will look like for Falcon Wealth Advisors clients in 2023. Can you walk us through that?

Jake:?We’ve done tax planning for years, but we have recently enhanced the process. We’re reaching out to clients and asking them to share their tax returns with us, which we can upload into our tax planning software. This software produces a report that summarizes the return. From there, we can begin building tax planning models for clients that show how particular decisions will affect their tax situation.

When we execute this process, we aim not just to lower a client’s taxes this year, but over their entire lifetime. Accountants have an important and difficult job, but they’re often focused on lowering taxes?this year. At?Falcon Wealth Advisors, we believe in proactively planning to reduce your tax liability over your lifetime.

Cory:?Indeed. We help clients optimize their tax situation and aim to lower their overall lifetime tax liability. I believe our proactive tax planning capabilities is something that separates us from other wealth advisors. With that said, our intent is not to replace a client’s accountant. We want to work with their accountants and we enjoy collaborating with other financial professionals.

Jake, can you share an example of how us reviewing a client’s tax return has allowed our team to improve a client’s tax situation?

Jake:?Well as many people know, the tax code is quite complex, which opens the door to filing and reporting mistakes. We’ve caught a few errors on client tax returns and helped them amend their tax return and actually get money back from the IRS. I’ve also seen people mistakenly not deduct backdoor Roth contributions, which can lead to them owing more than they should. This is a situation our team can help clients navigate, along with their accountant.

Cory:?Another example: last week?Caprice Black was on?Upticks?and spoke about how the amount a retiree pays for Medicare Part B and Part D premiums is driven by their taxable income. We can help clients tax plan to minimize the cost of those premiums, when appropriate. Separately, we can also pursue strategies that can help clients reduce their capital gains tax exposure. All of this is possible because we are able to use our tax planning software and expertise in harmony.

Jake, what are some other tax planning and financial planning considerations people should think about through the end of 2023?

Jake:?There are so many, and it of course varies from person to person. Here are a few:

• If you’re still working, review your employee benefits, especially if you moved to a new company or your company was acquired. Your?401(k) program?may allow for Roth contributions, for example, which could benefit your financial plan.
• Make sure you’re familiar with SECURE Act changes, including the pretax IRA required minimum distribution age increasing from to 73 or 75, depending on when you were born. This change gives people more years to execute Roth conversions.
• If you owe a lot of money on your tax return, talk to your accountant and fiduciary wealth advisor about estimated tax payments.
• Make yourself aware of how much your taxes could rise when the Tax Cuts and Jobs Act sunsets in 2026. This fact means you may want to make Roth contributions and pursue Roth conversions now, while tax rates are lower.

Cory:?That’s a lot of useful information. I think these are the main takeaways for our clients:

• We have a process in place to navigate everything Jake just mentioned, and much more.
• Now is the time of year to have these discussions and work with your fiduciary wealth advisor to be proactive and eliminate the odds of an unpleasant surprise.

Again, if you received a large refund or owe a lot of money on your 2022 taxes—whether you’re working or retired—now is the time to evaluate how you’re withholding money for taxes. A $5,000 refund isn’t something to celebrate. If you’re retired and took $50,000 worth of withdrawals from your pretax IRA last year but got a $5,000 refund, you actually took $55,000 from that IRA. Over withholding like this can impact your long term?financial plan.

Jake:?Yes, if you’re getting a big refund, that means that refund wasn’t in your portfolio where it could grow.

Cory:?And I want to reiterate the tax code is constantly changing. The age for required minimum distributions has changed multiple times in recent years, for example.

One last question, Jake. If you get your tax return back, would you rather receive a refund or owe?

Jake:?I would rather owe, because as previously discussed, I could buy treasury bonds that mature around the same time taxes are owed, which should lessen their impact.

Cory:?Spoken like a true financial planner! You may as well earn interest on your money, rather than Uncle Sam earning it. I agree with you, I would rather owe than get a big refund.

Thanks so much for joining me, Jake. I think you did a good job of explaining how tax planning impacts a client’s overall financial plan. If you would like to learn more about how we help clients tax plan, please don’t hesitate to contact me today. You can reach me directly at?[email protected].

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.