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Tax Planning

Tax planning touches everything we do with our clients.  It is not necessarily how much you make that matters, rather how much you get to keep after taxes.  With every move we make, we take into consideration the tax impact.  Sometimes the move that saves you taxes today, can actually cost you even more taxes in the future.  We take a long term, sometimes even multi-generational, view to the tax effects of any big decisions we help clients make. 

We can help you decide on which mix of investment vehicles will be the most beneficial to you, and your family.  This could include ROTH or Traditional IRA, Employer sponsored retirement funds  such as a 401k, 403b, TSP, SIMPLE IRA, SEP IRA, Tax Managed accounts and more.

While we do not actually prepare tax returns, we can work closely with your tax professional to make sure you structure your affairs to take best advantage of the opportunities available in the tax code. 

It is part of our service model to keep track of you and what’s going on in your life so we can advise you on some of the tax strategies that might save you hundreds or thousands of dollars, each.  These could include:

  • Tax loss Harvesting
  • Funding an IRA
  • ROTH Conversions
  • Selling tax lots with the least capital gain first
  • Annuity/Life Insurance 1035 Exchanges
  • Self Employed Retirement Plans
  • Spending order in retirement
  • Advise on ROTH vs Traditional

Frequently Asked Questions About Tax Planning

  • How can I legally avoid paying taxes on my investments?
    • One of the easiest ways to ensure your investments are tax efficient is by considering retirement plans such as IRAs, ROTH IRAs, SIMPLE IRAs, 401k’s and other employer retirement plans. With these plans you are able to defer taxes until you are retired, and hopefully in a lower tax bracket.  Or with a ROTH pay taxes now and all future growth can be tax free.
  • What is tax loss harvesting?
    • Tax loss harvesting is the process of selling some of your investments that have an unrealized loss, this will reduce your taxable capital gain income. Some more complex strategies involve immediately reinvesting into similar investments to stay in the market.  Do your research or talk to a professional before attempting these strategies, as there are stumbling blocks including wash sale rules.
  • What is a ROTH conversion?
    • A ROTH conversion is moving assets from a traditional IRA to a ROTH IRA. This is a taxable event, and the entire balance will be taxable in the year it is moved.  However, after the conversion the balance will be ROTH and all future growth can be tax free.
  • Should I use a traditional or ROTH retirement plan?
    • The first consideration is estimating whether you believe your tax rate will be higher now or in retirement. Typically, if your tax rate is higher now traditional makes the most sense.  If you estimate your tax rate will be higher in retirement, ROTH makes the most sense.  If you are unsure, there is nothing wrong with doing a little of both.
  • I own my own business, should I open my own business retirement plan?
    • If you own your own business and want to save more for retirement in a tax advantaged way, a business retirement plan is a great way to accomplish those goals. There are even good options for small businesses and sole proprietors such as Solo 401K’s, SIMPLE IRA’s, SEP IRA’s and profit-sharing plans.
  • What is a backdoor ROTH IRA?
    • A backdoor ROTH is simply making a nondeductible IRA contribution, then doing a ROTH conversion.  It can be a useful strategy if you make too much to contribute to a ROTH IRA. However, it may soon be disallowed by legislation. (2022)
    • There are some complications to be aware of.  If you already have a Traditional IRA, any basis from non-deductible contributions is spread among all your IRA funds.  Even if it is in a totally separate account.  Speak to a professional and/or do some research before committing to a back door ROTH strategy.  
  • Is my social security taxable?
    • It depends, your social security benefits will either be 0%, 50% or 85% taxable, depending on your Combined Income (CI).  Combined Income is calculated by adding together your Adjusted Gross Income (AGI) and your nontaxable interest and one half of your Social Security benefits.  If your social security is 50% taxable, and your social security is $1,000, only $500 would be subject to tax, at your ordinary income tax rate.
    • Single – Under $25,000 CI is 0% taxable; between 25,000 - $34,000 is 50% taxable; over $34,000 is 85% taxable (2022)
    • Married Filing Jointly – Under $32,000 CI is 0% taxable; between $32,000 – $44,000 is 50% taxable; over $44,000 is 85% taxable (2022) 
  • How are my investment earnings taxed?
    • Typically, non-retirement investment earnings come in 2 forms, income, and capital gain.  Investment earnings like dividends and interest are typically taxed as ordinary income. This is like how your paycheck may be taxed.  However, some may be qualified dividends, taxed at capital gains rates.  Alternatively, when you sell one of your investments for more than you paid, the difference is taxed as capital gain.  If you didn’t wait a full year before you sold, it will be taxed as short-term capital gain.  Short-term capital gain is taxed at the same rate as your ordinary income.  However, if you hold the investment for more than a year, it will be taxed at long term capital gains rates.  These rates are preferable to ordinary income or short-term gains rates.  They could be as low as 0%, if you make less than $54,625 (2022) or double that if you are married filing jointly.  And if you make less than $488,500, they cap out at 15%
  • Do I have to pay capital gains tax when I sell my house?
    • Probably not.  If you are selling your primary residence, (you lived there 2 out of the previous 5 years) you are eligible for a $250,000 capital gain exemption.  This exemption is doubled if you are married, and it is prorated if you didn’t live there the full 2 years.  For example, if you lived at your house for 1 year in the past 5 years, you would have a $125,000 exemption. If you purchased your home for $150,000, then sold it for $300,000, you would only need to pay capital gains on $25,000 ($300,000 – $150,000 – $125,000 = $25,000).  You are also able to add basis to your house for any improvements.  In the above example, if you added an extra bedroom to your home, and spent over $25,000 you would not have to pay any capital gains taxes.

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