Top 5 Reasons Tax Planning Strategies Are Important

Top 5 Reasons Tax Planning Strategies Are Important

Taxes are often a forgotten part of a financial plan because no one likes to think about giving Uncle Sam a cut of hard-earned cash. Even though tax season isn’t the most wonderful time of the year, you can work the tax code to your favor by participating in a little exercise known as tax planning.

Unlike tax preparation, tax planning takes place year-round. Tax planning is a strategy that works to reduce your tax obligation to the bare minimum. 

Avoiding taxes is a big no-no, but you can perform a few personal accounting changes during the year to make your tax burden as low as possible. 

Feeling Intimidated by Tax Changes in 2022? Get to Planning with a Financial Advisor in Pittsford, NY.

Each person will have a different tax plan since taxes vary depending on income, marital status, savings rates, and asset allocation. But tax planning is crucial, especially if you’re preparing for retirement life (and a fixed income). 

Here are five reasons why tax planning is essential:

Efficient Taxation

Yes, tax planning and tax efficiency are pretty much the same things. No one undertakes a strategy to pay MORE taxes, but it’s easier said than done.

Minimizing your tax bill requires a deep understanding of tax rates, including the different income levels and capital gains rates.

For example, suppose you have an investment portfolio that has generated substantial returns over the last few years. In that case, you may be looking to take some profits and patch up your emergency fund and or children’s college fund. 

Selling Stock is a taxable event, but you can minimize your burden by using a few tax-saving techniques. 

Utilize the long-term capital gains rate by selling investments you’ve held for longer than one year. If you’ve held losing stocks for a year in your portfolio, you can sell for a loss and offset other gains plus up to $3,000 in capital gains per year. 

You can even use a strategy called Tax Lot Identification to sell specific shares you’ve held longest to maximize your tax savings.


Stay Up-to-date on Legislation

The US tax code is a complex one, and it’s made more difficult because it’s malleable. Tax changes are always a concern for savers and investors, especially when a new administration or political party controls Washington. 

You can prepare yourself for changes and work on more tax deductions by engaging in tax planning with a trusted financial advisor.

Recently, the Biden administration had some essential tax changes inserted into the Build Back Better plan, many of which affect high earners. One of the most contentious issues is the Backdoor Roth Conversion. This tax loophole lets individuals with income levels over the Roth limit contribute to one through a ‘backdoor’ method. 

A Backdoor Roth is simply a traditional IRA converted to a Roth via a non-qualified contribution. Since Roth IRA investments grow free from taxation, this loophole is vital to individuals with high incomes.

The Build Back Better plan initially called for a curtailing of the Backdoor Roth conversion, but this provision was scrapped when the bill failed. Were you up to date on all these happenings? 

Ready to discuss tax planning with a tax liability advisor at Compass Wealth?


Seeing the Big Picture

When discussing financial planning, it’s sometimes hard to see through the minutia. Focusing on maximizing your income and investment earnings makes it easy to become too focused on the micro. 

But a financial plan is an all-encompassing blueprint, not just a series of maneuvers and trades. Tax planning with a financial advisor allows you to take a step back and view your financial health holistically. 

Are you still on the same path you wish to follow to retirement?  Have any changes in your life (salary raise at work, windfall via inheritance) changed your financial outlook? 

A good advisor can use the tax planning process to form an overview and discuss possible big-picture changes.


Dealing With Loss of Income

COVID has left its mark on the lives of millions of Americans, both from a physical and mental health standpoint. Not only are countless people affected by the loss or debilitation of loved ones, but many are dealing with job losses, business closures, and other types of income loss. 

While no one would choose income over the health of a loved one, these are both permanent losses. You can’t recover wages or salary lost because you won’t get that time back.

You can, however, prepare for stretches of reduced income through tax planning. If you need to sell some assets to make ends meet, tax planning can help reduce your obligation on the sale of those assets. 

Losing a job is bad enough – you don’t need an excessive tax plan to complicate matters further.


Maximizing Retirement Savings

How do your retirement plans look? Have you had to tap into your retirement account? If you have a tax plan moving forward, you shouldn’t have to.

The main goal of any solid financial plan is a safe and satisfactory retirement. Living out your golden years on your terms, free from money worries, benefits both you and society. Self-sufficient retirees allow new people to enter the workforce and aren’t dependent on the government after working. 

Tax planning plays a huge role in financial security since retirees on fixed incomes are at the mercy of inflation and taxation.

Inflation is a beast of its own, but tax planning creates an efficient retirement savings system of investing and withdrawing. Spread your assets in the most tax-efficient vehicles: growth stocks in a traditional 401(k), dividend-paying stocks, and bonds in a Roth IRA. By doing so, you can reduce your tax bill.

This allows you to prepare for those pesky required minimum distributions (RMDs) that affect all non-Roth retirement vehicles.

Additionally, tax-deferred accounts like annuities, Health Savings Accounts (HSAs), and education savings vehicles like 529 plans can reduce your tax burden and give you more control over your nest egg. If you’ve been putting off tax planning, don’t wait another year! Contact your advisor today and start planning to reduce your obligation to Uncle Sam.

Questions to prepare for when you reach out to Compass Wealth :

  1. What tax year would you like to start planning?
  2. In which tax bracket are you? 
  3. Do you have last year’s tax return?

Let’s talk!


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Securities offered through Cetera Financial Specialists LLC (doing insurance business in CA as CFGFS  Insurance Agency), member FINRA/ SIPC. Advisory services offered through Cetera Investment Advisers  LLC. Cetera entities are under separate ownership from any other named entity. Home offices at 1450  American Lane, Ste 650, Schaumburg, IL 60173; phone 888.528.2987. 
For a comprehensive review of your personal situation, always consult your tax and/or legal advisor.  Neither Cetera Financial Specialists LLC nor any of its affiliates offer tax or legal services.

About the Author: Rob Chapman, CPA, PFS, CMA

Rob founded Compass Wealth in 2000 and has been helping clients achieve their financial dreams since then. With over 30 years of experience in financial services, Rob specializes in financial, estate, retirement, tax strategies from Chapman & Co. P.C. and planning, investment management, and risk management through Compass Wealth, LLC.
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