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Tax Planning

Tax Planning

Is there anything quite like that feeling of having made it? It’s true we all have a different vision of what success looks like. But according to a February 2021 American Directions Research Group study, 79% of Americans believe financial security is the key part of achieving true happiness.   


On the surface, that sounds straightforward enough. Make smart choices, leverage the resources around you, and financial freedom will surely follow, right? Unfortunately, come tax season, you’re likely to find out it just isn’t that simple.  


There’s nothing more disheartening than watching your return disappear as you complete your taxes. That’s where tax planning comes in. With some strategic advice from a knowledgeable wealth advisor, the weight of your tax burden could become significantly lighter. 

What is Tax Planning and Why is It Important? 

Tax planning is the analysis of your financial situation and strategizing so that you owe the minimum possible on your taxes. Have you ever been blindsided by the amount due on your federal taxes? Or maybe felt dispirited by how little of your income you actually get to keep? If so, you have an idea of why tax planning is so important.  

The benefits go so much further than simply minimizing your tax burden. Achieving sustainable financial freedom doesn’t happen by chance. Even if you’re currently a high-net-worth individual, your finances may grow in a “two steps forward, one step back” rhythm.   

For every hard-earned success you win, the IRS has to take their piece, too. But with effective tax planning, your portfolio will be optimized – meaning you and your loved ones can truly enjoy the fruits of your labor. There are several strategies our wealth advisors might suggest, depending on your goals and where you are financially. 

Reducing Your Taxable Income Through Income Deferral or Shifting

One way to lower your tax liability is through two methods called income deferral and income shifting. Income deferral is when you postpone receiving your income until a specific tax period or year. This, in turn, reduces your taxable income in the current year. There are several ways you might go about this.  


Retirement Accounts

Taking advantage of retirement accounts like a 401(k) or a traditional IRA lets you save for the future while deferring current taxes. You can do something similar with any stock options you receive, too.  


Asset Sales

When selling an asset — like a business or property — you can structure it as an “installment sale.” You get to recognize the sale income over multiple years, minimizing your tax burden for the current year.  


Income Shifting

Income shifting is the process of transferring your income from a higher bracket to a lower one. This can be extremely effective if you, for example, have loved ones or entities with a lower tax rate.  


Business Structure or Family Trusts

If you own a business, there are certain business structure and systems you can use to shift income and pay a lower tax rate. Family trusts are another excellent way to keep income in the family while staying in a lower tax bracket. 

Reviewing and Optimizing Your Current Tax Deductions

At Asset Advisory Services, we believe that working with a wealth advisor makes tax planning much more effective, but especially when it comes to deductions.

 

Sure, you may already know how to decide between itemizing versus taking the standard deduction. But there’s so much more to it than that.


You may notice huge benefits from accelerating deductible expenses like mortgage payments, which provide a great offset to your taxable income. Or maybe we’ll discover that you should be bunching your deductions, which means grouping large expenses like medical bills or charitable contributions, so you exceed the standard deduction and enjoy the benefits of itemizing.

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Examining Your Tax-Deferred Investment Options

When it comes to tax planning, tax-deferred investment options can be hugely beneficial. One common example is a 401(k) retirement plan. When sponsored by your employer, you get to contribute pre-tax income, which then helps reduce your annual taxable income.  

Both contributions and earnings stay tax-deferred until you withdraw at retirement. This makes it likely that you’ll ultimately pay a lower tax rate than if you’d kept the funds in a traditional bank account.  

There are also options like HSAs if you have an insurance plan with a high deductible, since those contributions are tax-deductible too. Since there’s no limit on using these funds, you have the potential for long-term tax-deferred growth.  

Leveraging these options will not only help reduce your current tax liability, though. You can also use these to potentially optimize your tax bracket and accumulate long-term savings. 

Strategizing for Year-End Returns (Including Tax-Loss Harvesting) 

One of the best times to plan for your tax return is before the tax year officially wraps up.

 

An effective strategy for doing so is tax-loss harvesting, which is when you offset your capital gains by selling any investments that have experienced a loss.    


Basically, we’ll review your portfolio for investments that aren’t pulling their weight. This means anything that’s declined in value since you purchased it. After determining the capital gains we need to offset, we’ll discuss the investments with unrealized losses.    


In the scenario where your capital losses actually exceed the gains, we can look at using it to offset any other taxable income. Or we can look at carrying the losses forward to offset gains and taxable income in future years. 

What Advanced Tax Planning Strategies are Available for High-Net-Worth Individuals to Help Minimize Their Tax Burden?

As a high-net-worth individual seeking to minimize your tax burden, our wealth advisors might suggest any of the following (in addition to the strategies mentioned above):  


Family Limited Partnerships (FLPs) and Limited Liability Companies (LLCs)

These structures give you a legal avenue for transferring assets among your family members. Most importantly, you can do so while maintaining control and reducing the value of your portfolio/estate on paper. This can be a smart way to help minimize your estate and gift taxes.  



Qualified Small Business Stock (QSBS)

If you own a business, there are certain business structure and systems you can use to shift income and pay a lower tax rate. Family trusts are another excellent way to keep income in the family while staying in a lower tax bracket. 

 


Charitable
Donations

It may be wise to establish a charitable remainder trust, donor-advised fund, or even a private foundation to maximize your tax deductions. As a bonus, you’ll also be supporting causes that matter to you.

These examples are just the tip of the iceberg. At Asset Advisory Services, we pride ourselves on being both knowledgeable and thoughtful about the advice we give you. That’s why the first thing we do is get to know your goals and current portfolio on a deep level.  

When you work with us, you’ll always be informed of any tax strategies that may benefit you – even the most advanced or little-known options. 

What Professional Assistance or Resources are Available for Individuals or Businesses Seeking Tax Planning Advice?

Here at Asset Advisory Services, we have more than 75 years of combined experience providing tax planning advice to individuals and businesses. No matter what your plan for the future looks like, our team has the certifications and knowledge to help you get there.  

There are resources out there that you could try to use for your own tax planning. The U.S. Small Business Administration, for example, offers a tax planning guide for small business, and the IRS has an online guide to help individuals get a jump start on taxes. The thing is, there’s a wide valley between reading this information and truly understanding how to apply it. It would take you years of daily studying and research before you could expertly and effectively handle tax planning, let alone your financial planning as a whole.   

We believe your best path forward is working with a knowledgeable, professional wealth advisor who takes the time to really listen and understand your goals. That’s exactly what you can expect when you work with the team at Asset Advisory Services. 

*Asset Advisory Services, Inc. does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

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