What is Tax Planning?

Tax planning is one of the key topics of financial planning. Unlike tax preparation, when you would gather your financial information to file your tax return, tax planning is about researching and implementing strategies to lower tax liability.

There are a multitude of tax planning strategies, especially if you are a business owner. Regardless of what the strategies entail, they are normally accomplishing at least one of three things:

• Reducing taxable income
• Reducing the tax rate
• Delaying the time you must pay the tax

In short, tax planning is about taking proactive steps to help us keep more of the income we make now and in the future. This extra money may make a big difference when we are planning to reach financial goals.

We may be able to lower our tax liability in many different ways. Here is an overview of the different areas of tax planning.

Individual Income Tax Planning

No matter if you work as an employee of a company or if you own a business, it all comes down to our individual income tax filings. It is important to understand how personal taxes are calculated and possibly lowered. 

First, one should understand how federal and state tax brackets are affecting our tax liability. 

• What is the appropriate filing status for our financial situation?
• In some cases, it may be advantageous to file separately if you're married or claim to be the Head of Household if you are single.
• Which tax bracket should we fill depending on anticipated future income?
• Having a long-term approach is important when tax planning. It is important to determine if there is a possibility that future income may push our taxable income to a higher tax bracket. If that is the case, it may be a good idea to convert some retirement assets to Roth IRAs for example.

Second, depending on your financial plan, it is important to create a list of income tax deductions available..

• Should you use the standard tax deduction or look to itemize instead? 
• If the amount of itemized deductions is similar to the standard deduction, it may be favorable to bunch deductions within the same year. In this situation, alternating between using itemized and standard deduction may give the biggest tax advantage over time.
• Are you able to use a Flexible Spending Account (FSA) or a Health Savings Account (HSA) to plan for required expenses?
• For many families, it may make sense to use an FSA or HSA. The accounts help lower some of our costs by giving the ability to pay the expense before the income is taxed.

Third, one should also consider how the Adjusted Gross Income (AGI) is calculated and what it may affect?

• Would attempting to lower the AGI help maximize a Student Loan Repayment strategy?
• If an income-based student loan repayment program is used, payments are calculated based on the AGI. Attempting to lower the AGI may result in lower student loan payments.
• Would lowering the AGI reduce the Medicare Part B cost?
• For the same reason, someone may be able to save on Medicare Part B premiums. 

Also, if one is fortunate to have a high income, it may also be important to understand the Alternative Minimum Tax (AMT).  The AMT calculation may raise the amount of taxes someone has to pay. It is important to understand when it may come into effect.

Tax Planning for your Business

There are many benefits to owning a business. One of them is the tax advantages it may provide. Here are some of the questions you may want to answer when owning a business.

• What is the proper operating status of the business?

It may be beneficial to file taxes as an S-Corp over another business structure for example.

• How should you balance lowering self-employment taxes and maximizing Social Security benefits?

It is important to understand the relationship between lowering self-employment tax and the calculation of Social Security benefits. Youmay want to balance having a lower tax burden today and a larger Social Security benefit in retirement.

• Does our company qualify for the 20% qualified business income deduction (QBI)?

The 2017 Tax Cuts and Jobs Act (TCJA) gave small business owners a 20% business income deduction if qualified. 

• Which type of qualified retirement plan should be established for the business?

If a business owner is looking to establish a retirement plan for the business, it is important to pick the one that offers the best fit for the size and type of business.

• What are the pros and cons of taxable fringe benefits?

Some companies may also be able to add some fringe benefits to help attract and retain employees. It may also be an efficient way to offer benefits to workers.

• Are we able to deduct home office expenses?

If a business owner and/or their employees work from home, it is important to determine how to deduct the expenses.

• Should we add a family member on the payroll?

Some business owners may benefit from spreading income to other family members to help lower tax liability.

• Can we take advantage of the tax benefits of depreciating a business asset?

It may be favorable to depreciate needed equipment or a large asset.

Investment-Related Tax Issues

One of the items of a financial plan is investment positioning. When creating a financial plan, we have to assume a rate of return on our investments to help anticipate the plan’s odds of success. Investment tax efficiency is important as it may help improve the return net of taxes without having to take unnecessary market risk. Here are some of the topics to consider.

• Are we taking full advantage of the primary home capital gain exemption?

If a home-owner has lived in a home for two of the last five years, he/she may be able to take advantage of a capital gain exemption. 

• Are we able to avoid short-term capital gains by selling investments later?

Depending on the investment strategy, it may be beneficial to plan when an asset may be sold to delay and possibly reduce the capital gain tax rate.

• Is there unused depreciation on investment real estate we own?

Investing in real estate provides tax advantages including the ability to depreciate the asset. For that reason, it is important to know the amount of depreciation used in the property.

• When selling an investment property, can we use the exchange in-kind strategy?

Selling a property with a low-cost basis may increase tax liability. It is important to understand all of the options available before selling property.

• Should an Opportunity Zones investment be purchased when selling an asset with a large capital gain? 

An Opportunity Zones investment is a strategy that may help delay and possibly reduce tax liability on the sale of an asset with large capital gains.

Retirement Planning

Retirement Planning is also an important goal within most financial plans. We save money on current income to be spent in retirement. Many workers base their retirement plan readiness on the amount of assets they own. A retirement portfolio that is tax efficient may help achieve the retirement readiness goal faster. Here are some things to consider.

• How much should be saved in the employer plan (401(k), 403(b), etc)?

Tax planning should give guidance on the amount of money that should be put aside in a retirement plan.

• When should a Roth account be used over a Traditional retirement account?

Depending on the situation, it may be beneficial to pay the taxes today to possibly benefit from tax-free income in retirement.

• What is the tax-efficient way to use employee stock ownerships (ESOP) and stock options?

ESOPs and stock options can be complex. It is important to understand how they work to reduce possible tax costs.

• When should traditional and Roth IRAs be contributed to?

Contributing to an IRA may provide additional benefits when compared to an employer retirement plan.

• If all retirement accounts are maxed out, what investment should be used for more tax-efficiency?

Retirement accounts were created to provide tax efficiency for Americans looking to save for retirement. Once they are maxed out, it is important to look for additional investments that may provide tax efficiencies.

Family Matters

Life transitions may have tax implications. Some family matters may give us tax credits while others may increase our tax burden. Here are some of the things to consider.

• How should I pay for childcare in a tax-efficient manner?

Using an FSA may be beneficial when paying for childcare expenses.

• What are the income and age limits for child tax credits?

The government supplies child tax credits to help American parents. However, it may be important to know the income and age limits when planning to maximize the credits.

• When should someone be concerned about the Kiddie Tax?

In certain situations, a child income may trigger the Kiddie Tax. The tax has high tax brackets. Therefore, it is important to learn how to possibly lower the liability.

• When kids are studying in college, what are the tax benefits?

There are also tax benefits of having a college student. One needs to understand the income limits to maximize the benefits.

• How does paying or receiving alimony affect tax liability?

Alimony payments are deductible to the payer spouse and taxable to the spouse receiving the payment.

• When should I claim someone as a dependent?

It may be beneficial to understand when someone should be added as a dependent on our tax return.

Transfer Tax Planning

Some of us may be fortunate enough to have been able to accumulate a substantial amount of assets throughout their lives. These families may consider the tax benefits of planning their wealth transfer to the next generations. Here are important things to consider.

• What is the current lifetime estate tax exemption amount?

Assets above the tax exemption amount are taxable at a high tax rate. 

• Should a trust be used to possibly lower estate taxes?

It may be beneficial to create an estate plan to minimize estate tax liability.

• Would a 529 plan be a good strategy to establish an educational legacy for future generations?

If a family wants to create an educational fund that will last decades, a 529 plan may be a good fit. 

• Would it be more tax-efficient to hold on to an asset to take advantage of the step-up in cost basis rule?

Assets owned at death in non-retirement accounts get a step-up in basis. It may be beneficial to hold on to low-cost basis assets to lower tax liability when they are transferred to future generations.

Charitable Tax Planning

If someone is charitably-inclined, there are also tax advantages to consider. The strategies may help someone give more to their chosen charity over time. Here are some things to think about.

• What is a tax-efficient charitable tax planning strategy when using the standard deduction?

There are vehicles that help charitably-inclined families by providing tax efficiency.

•  When is it advantageous to use a donor-advised fund?

It may be advantageous to use a donor-advised fund to bunch together planned contributions for tax efficiency.  

• When is it beneficial to form a family foundation?

A family foundation may provide additional benefits for high networth families that are looking to establish their charitable mission.

• What are the tax-deduction limits to consider when making charitable donations?

There are certain limits to the amount one can deduct from their taxes for charitable donations.

• When are qualified charitable distributions (QCD) a beneficial strategy? 

For Americans that are required to take distributions from their retirement accounts, using the QCD strategy may provide a way to use RMDs for charitable donations while increasing tax efficiency.

New Tax Laws

To add to the complexity of tax planning, tax laws are often changed based on which party controls the government. Therefore, it is important to keep abreast of changes to the tax code to find out if the benefits of the strategies noted above should still be considered.

Conclusion: The Importance of Tax Planning

Keeping more of our hard-earned money is important when planning on accomplishing life goals. There are a lot of moving parts within the tax systems which makes it complex. Therefore, it is important to have the assistance of a tax accountant in tandem with a financial planner to reap the full benefits of proper yearly tax planning. 

Sources:

• Tira Orem: “Tax Planning for Beginners: 6 tax strategy concepts to know” 6/28/2020 https://www.nerdwallet.com/article/taxes/tax-planning
• “2020 Personal Tax Planning Guide” KPMG https://tax.kpmg.us/content/dam/tax/en/pdfs/2019/kpmg-2020-personal-tax-planning-guide.pdf
• “Tax Planning 101: a full breakdown” 1/27/2020 https://www.cashay.com/tax-planning-101-breakdown-151723875.html

Important Disclosures

Communications such as this are not impartial and are provided in connection with advertising and marketing of the financial services offered by Parick Traverse and MoneyCoach. Neither MoneyCoach nor Patrick Traverse is an attorney or a tax professional and the information contained herein should not be considered tax or accounting advice, legal or regulatory advice. 

The references to tax planning discussed herein is intended to be educational in nature are not intended to be tax advice, but rather only a reference to some of the information contained therein and should not be relied upon for any other purpose and is not designed to be a recommendation for any specific investment product, strategy, plan feature or other purposes. Accordingly, it should not be construed by any consumer and/or prospective client as solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation. Prior to making any investment or financial decisions, an investor should seek individualized advice from a personal financial, legal, tax and other professional advisors that take into account all of the particular facts and circumstances of an investor's own situation.

MoneyCoach and Patrick Traverse offer Investment advice through Belpointe Asset Management, LLC, 125 Greenwich Avenue, Greenwich, CT 06830 (“Belpointe"). Belpointe is an investment adviser registered with the Securities and Exchange Commission (“SEC”). Registration with the SEC should not be construed to imply that the SEC has approved or endorsed qualifications or the services Belpointe offers, or that or its personnel possess a particular level of skill, expertise or training. Insurance products are offered through Belpointe Insurance, LLC. Important information and disclosures related to Belpointe are available at https://www.belpointe.com. Additional information pertaining to Patrick Traverse and/or Belpointe’s registration status, its business operations, services and fees and its current written disclosure statement is available on the SEC’s Investment Adviser public website at https://www.adviserinfo.sec.gov/.