Tax season within the United States shouldn’t be limited to only March and April. Our clients’ taxes and the tax saving strategies we will develop for them needs to be on our minds year-round. Unfortunately, tax planning advice is simply too often almost exclusively about determining deductions. This is a mistake that may end up in customers leaving money on the table.
I’ve worked with many high net price individuals (HNWIs) – including the CEOs of among the largest publicly traded and privately held corporations within the United States – and too a lot of them fail to reduce their taxes. This could also be because they’re short on time or lack a strategic tax advisory team. But I’ve also found that HNWIs are likely to take into consideration investing when it comes to immediate returns: they do not have in mind fees and expenses, tax costs and long-term returns. And it’s precisely in these areas that investment advisors and asset managers can create the best added value.
Constant changes in tax laws require constant tax planning
The tax code has almost been revised or modified 6,000 times since 2001. The Tax Cuts and Jobs Act For example, the tax laws passed in 2017 is the most important revision to the tax code in 30 years. If you add that SECURE Actthe proposed one SECURE Act 2.0and associated retirement plan rule changes, the complexity might be overwhelming.
The original SECURE Act, enacted in 2020, has quite a lot of implications for HNWIs. It moved required minimum distributions (RMDs) from age 70½ to age 72 and removed the age limit for IRA contributions. The SECURE Act 2.0, passed by the House of Representatives and now before the Senate, would increase the RMD age to 75 and permit additional planning time in years before RMD.
No matter how we take a look at them, taxes are all the time complicated and always changing. To help our clients navigate this, listed below are my top five tax planning and saving strategies.
1. Maximize employer advantages
Customers with earned income should reap the benefits of employer advantages early and sometimes. While 401(k) options are fairly standard nowadays, high earners need to maximise mega-backdoor Roth options, health savings accounts (HSAs), and other useful offerings.
Let’s do the mathematics: If a client contributes $7,300 every year – the utmost for families in 2022 – to an HSA, they may accumulate $146,000 in 20 years. If these funds grow at 7% annually, they may have $320,000.
If clients don’t use these funds for medical expenses, they’ll distribute them penalty-free after age 65, although the distributions will probably be subject to extraordinary income taxes. If they spend it on assisted living, unreimbursed medical bills, or other health care services, they still save over $110,000 in income taxes at a blended tax rate of 35%.
2. Take advantage of charitable gift planning options
To further maximize tax savings, clients may use valued, long-term securities as an alternative of money; donor-advised funds (DAFs); and charitable foundations. You can provide these securities away without recognizing any gains and you may also time the income tax deduction to a yr with a high tax rate.
For example, say a customer donates $250,000 to a charity, but needs that $250,000 for lifestyle expenses later this yr. To make this possible, they sell $250,000 price of investments at a price basis of $100,000. If that they had made the donation in stock and covered personal expenses in money, they might have saved nearly $50,000. The lesson here: Planning charitable donations should include long-term, valued stocks. Clients may additionally need to pool their charitable donations in a high tax yr. This may end up in significant and lasting tax savings.
3. Tax losses in declining markets
Clients don’t love taking a look at their investment account statement and seeing unrealized losses or an investment that’s price lower than they paid for it. However, in the event that they must pay capital gains now or within the not-too-distant future, they will probably want to sell these positions to generate a capital loss and profit from the associated tax advantages.
For example, as an instance a client has a stock investment that lost $100,000, and the client also sold an actual estate investment this yr that generated a $100,000 profit. If they sold the stock position and realized the loss – essentially by monetizing a paper loss – they might offset the actual estate gain and save taxes. And in the event that they were to reinvest the proceeds from the stock sale into the same security, their overall investment position could be the identical. (That is, so long as they have not put any money into the identical investment. That would violate the Wash sales rule and render the loss useless.)
Because capital losses are carried forward indefinitely, this strategy could add value even when the client doesn’t expect the resulting profits to be realized for a few years.
4. Convert pre-tax IRAs to Roth IRAs
Clients should convert their pre-tax IRA to a Roth IRA during weak markets and low-income years. Roth IRAs There is not any upfront tax relief, but contributions and earnings increase and are ultimately distributed tax-free. On the opposite hand, a pre-tax IRA offers a tax advantage when initially funded, but upon distribution the income is taxable at normal rates. With careful marginal tax planning, converting pre-tax IRAs to Roth IRAs can minimize the whole tax paid on distributions.
While that is all the time tax planning strategy, it could actually be an especially smart move in the present environment. The current tax to be converted will probably be based on the present value and is predicted to be significantly lower in 2022 than last winter as a result of the market declines. When the market recovers, customers could achieve this extra growth tax-free because they’ve already paid the tax when making the transition.
5. Coordinate estate planning and income tax planning
Clients should consider gifting income-producing assets and assets with unrealized gains to members of the family in lower tax brackets, keeping the “child tax” rules in mind.
If a parent in the very best tax bracket has $32,000 price of long-term stock with an unrealized gain of $20,000, they’ll gift the annual exclusion amount to their offspring. Instead of selling the shares and making a gift of money — which could lead to nearly $5,000 in federal taxes — they’ll gift the shares on to the kid. The child could be based on the holding period and the prices. And so long as they are not any longer dependent, they might sell the shares and record the gain at their very own tax rate.
This strategy might be especially useful for adult children in graduate school or those just starting their careers. They could also be subject to a 0% federal long-term capital gains rate and should sell the shares income tax-free.
Taxes possibly certainly one of the two certainties on this world, but that doesn’t suggest our customers should overpay them. By offering customized tax planning and methods like this, we will ensure this is not the case and offer you the perfect deal Uncle Sam has to supply.
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