Tax Planning is a Year-Round Sport
Like many kids, I played nearly every sport when I was growing up, and each one had a season. Nowadays, there are opportunities for kids to hone their craft playing the sport of their choice throughout the entire year. Although perhaps not quite as entertaining, reaching your financial goals should be approached similarly; a year-round focus will yield significantly better results than choosing to dedicate only a few months per year to your financial future.
So, while you’ve likely just said “good riddance” to tax season and are eager to forget about it for another year, a good financial plan requires continual attention to ensure that all aspects of your finances are functioning in the most tax-efficient way possible. Almost every financial planning topic – whether it pertains to retirement, investments, income, or estate planning – has tax considerations, making tax-efficiency a cornerstone of any well-rounded financial plan. After all, it’s not just what you earn, but what you keep that matters most!
Taxes are among the largest expenses individuals and families encounter over their lifetime. However, they should be seen as something to be aware of and manage, not fear. Whether it's income tax, capital gains tax, property tax, or net investment income tax, each can reduce your disposable income and limit the resources available to you in the future. Along with other key investing principles, recognizing the ways taxes intersect during each stage of your financial life is critical to building a tax-efficient financial strategy:
Income Tax Planning: Optimizing Tax Brackets
Understanding your current tax bracket is one of the most important elements of tax planning. Tax brackets are graduated, meaning that as your income increases, a larger portion is taxed at a higher rate. Effective income tax planning involves strategically managing taxable income, potentially deferring or accelerating income when it can expect to be withdrawn at a lower rate. The goal is to manage your income throughout life so that you minimize the amount that falls into the higher tax brackets.
Investment Strategies: Tax-Efficient Investing
Investing without a tax strategy can significantly reduce the potential return on investments. Long-term capital gains, dividends, and interest income are all subject to different forms of taxation. Without careful planning, you may end up paying more taxes than necessary, causing significant tax-drag that shrinks your investment returns. There are more tax-aware investments than ever before — make sure you are up to speed on investing tools and strategies such as Exchange Traded Funds (ETFs), Tax-Free Municipal Bonds, Tax Loss Harvesting, Cost Basis Disposal Methods, Direct Indexing, Exchange Funds, and Donations in Kind for charitable contributions.
Retirement Contributions: Minimizing Tax Impact on Retirement Income
Congress has provided an array of tax-favored accounts to encourage retirement savings. The manner and order in which funds are withdrawn from these accounts can make a significant difference in the ability to ensure your nest egg lasts. The tax treatment of retirement accounts, such as 401(k)s, IRAs, Roth IRAs, deferred compensation plans, and pensions, directly affect how much money you will have at your disposal during retirement. Understanding how income is taxed in retirement can guide the decision now to contribute to a tax-deferred versus a tax-free account. Our experience has been that most individuals are in a lower tax bracket in retirement, however, the optimal savings vehicles are client-specific, based on their unique situation. Often, it makes sense to consider a combination of pre-tax, after-tax and Roth investments.
Estate and Inheritance Tax Considerations
Estate and inheritance taxes are potentially levied on the transfer of assets at the time of death and play a significant role in how your wealth is passed down to heirs. While estate tax laws vary by state, understanding potential implications is essential, especially for those with significant assets. Strategies like gifting assets to heirs during your lifetime or setting up a trust can help minimize Uncle Sam’s impact. Charitable giving is also a powerful tool that can reduce your estate’s taxable value while also benefiting causes that are important to you.
Tax Laws and Changing Regulations
Tax laws are constantly changing, and staying up to date with these changes is crucial for effective tax planning. The Tax Cuts and Jobs Act (TCJA), enacted in 2017, is set to expire this year, and a shift in tax policy could have a significant impact on your overall financial plan and tax liabilities. With potential changes to the tax code, new deductions, and updated credits, it's essential to have an advisor who can help you navigate the complexities of the evolving tax landscape. Additionally, non-compliance with federal, state, or local tax laws can lead to penalties, audits, and costly legal complications.
Partnering with the Right Advisors
Tax planning through anticipating future tax liabilities and adjusting your income strategies, is a fundamentally important part of a comprehensive financial plan. At Physician Wealth Advisors, we have the expertise to help you consider, analyze, and project the potential results of various tax strategies. While we do not prepare tax returns, we do review them as part of a comprehensive approach. Over the years, this part of our process has uncovered a number of tax reporting errors, saving clients thousands of dollars. For this reason alone, it's wise to partner with a tax-savvy financial advisor who can help integrate taxes into your broader financial plan.
Unlike the good old days of youth sports, taxes are not seasonal; they require year-round attention as part of a thorough financial plan. With the right advisors and strategies in place, you can reduce your tax burden, grow your wealth more efficiently, and ensure that your assets are passed on to your heirs with minimal tax drag — a powerful way to maximize the probability of achieving your financial goals.
Ryan Bladen is a Certified Financial Planner® and Vice President with Physician Wealth Advisors (a wholly owned subsidiary of the Utah Medical Association). The salaried advisors at Physician Wealth Advisors (PWA) have been working with physician members of the UMA for over 30 years. Their expertise in creating customized retirement plans as well as tailored investment strategies specifically to fit the needs of the medical community has led them to manage over $1.5 Billion of investment assets.
If you would like to see what Physician Wealth Advisors can do for you, please contact PWA at questions@pwa.org or at 801-747-0800.