Transcript

Wiser Financial Advisor – Lower Your Tax Bill Hi everyone, welcome to the Wiser Financial advisor show with Josh Nelson where we get real, we get honest and we get clear about the financial world and your money. This is Josh Nelson, founder and CEO of Keystone Financial Services. Let the financial fun begin! Thank you for joining me today. It is tax season 2024, which means that a couple of things are happening. People are probably thinking about their taxes and looking at the last year, seeing if there were any opportunities that were missed or maybe some planning that could have been done to avoid a big surprise on the downside. And so our topic today is how a financial planner or financial advisor can help lower your tax bill. One advantage of working with a Certified Financial Planner (CFP) is that tax planning is a core part of the curriculum and job of a Certified Financial Planner. If you work with a CFP, that is the gold standard in the financial industry. Our job is to look at your entire financial picture, not just your investments or just your retirement planning or just insurance. Really, it’s looking at everything. Of course, taxes have a major impact on all areas of finance, so it’s not to be minimized. We’ve noticed over the years as CFP’s with our clients, is that oftentimes people don’t have a tax advisor that they work with. More and more people’s tax situations have gotten simpler in some ways. And because of that, they use tax software like TurboTax or Tax Cut or something else to do it themselves. No problem doing that. We still even know some people who do that by hand on paper, and they still enjoy it and think it’s fun. It’s a puzzle. That’s why we have a fun job because we’re trying to always solve problems. And software has solved this puzzle of somebody’s financial situation and how to put all the pieces together the correct way. So, it’s important to think about the fact that people are trying to do this on their own, but may not necessarily have the level of expertise. Even if they are working with an advisor, that doesn’t necessarily mean that proactive tax planning has been happening throughout the year. That’s not a knock on your CPA or tax preparer, but the reality is, oftentimes what you’ve hired them for is to prepare the tax return. It’s hard to strategize with you at tax time. If you’re a business, you might have more ongoing conversations throughout the year, quarterly estimated payments, things like that, but you have to look at your relationship with your tax preparer and understand that your financial planner or financial advisor could play a crucial role in helping to do your tax planning, at least in terms of forecasting the possibilities and strategies that can help reduce your tax. So, what is tax planning? Tax planning involves looking at your finances holistically, and then incorporating strategies to reduce your overall tax bill either now or in the future. We’ll talk about that because financial planners help you not only plan for today, but plan for tomorrow. And tomorrow might not just be next year, it could be five years, 10 years, 30 years from now. It might even be that you’re passing the assets on to your loved ones and trying to do that in the most tax efficient manner. Understanding the rules of the game, playing with some numbers and making sure that we’re able to make some judgment calls is important. A financial planner should be your advocate, your fiduciary, which means that it’s their job to look out for your best interest. Certainly that’s something that we at Keystone do. All of our financial planners are Certified Financial Planners and they are people who enjoy their jobs helping clients look at their overall tax situation with their financial plan. So, how can the financial advisor help specifically? One way is by understanding the rules of the game, and those rules change all the time. Congress tends to make some changes at least every couple of years, and oftentimes there are massive changes. So it’s something that we’re always having to stay up so we’re prepared about the things that aren’t quite so obvious that you might be able to take advantage of. Congress isn’t perfect, so sometimes when they craft legislation and pass it, they leave some loopholes that you can still take advantage of. I would never suggest that you cheat on your taxes or do anything unethical. What we’re talking about is taking advantage of the rules of the game and using different strategies. An example of that is charitable giving strategies. There is the concept of being able to do a Qualified Charitable Distribution. If you are age 70 1/2 or older, you’re able to give away part of your Required Minimum Distribution and have it go directly to a charity without any taxes withheld, and the charity does not have to pay any taxes either. There are lots of different nuances on all these strategies I’m going to mention. Also, you can use Donor Advised Funds when giving to charity. We can use a 1031 exchange, where we’re exchanging portions of somebody’s real estate to another piece of real estate in a qualifying exchange. Oftentimes there are ways that we can do that to help pass on those gains to heirs. Upon death, current rules say that we get a step up in cost basis for a lot of assets as long as they’re not in a retirement plan and you own them. Typically your heirs will receive a step up in cost basis. That is the name of the game, especially for people that are well-known. They do 1031 exchanges to continue passing on those gains until they die and gain that step up in basis. Their heirs are not subjected to capital gains taxes in most circumstances. The other thing to think about is tax loss harvesting towards the end of the year. A great Certified Financial Planner will be looking at your portfolio and they should be keeping you up to date throughout the year as far as your capital gains and dividends and overall tax liability from your investment strategy. Towards the end of the year, we look at making some lemonade out of situations where you have a stock that just didn’t do well. For whatever reason, it went backwards and you’re sitting at a loss. Using tax loss harvesting, you would go ahead and sell that thing and offset the gains. We did that a lot in 2023. We certainly did that a lot in 2021 when the market did well and there were a lot of gains that people were experiencing. We looked for those opportunities in people’s portfolios. So we’re certainly using capital losses to offset gains and making sure that we’re being thoughtful about any moves that are happening inside your portfolio. Also keep in mind using tax efficient investment vehicles when possible. Of course, the things that you think about are things like retirement plans, tax deferred savings account options, health savings accounts, 401K’s, traditional and Roth IRAs, 529 plans. The list goes on. There are a lot of different types of retirement plans and education plans that are tax deferred, sometimes even tax deductible and sometimes even tax free on the back end. And we could do an entire podcast episode just on Roth IRAs, right? We’re not going to get into the details on all of these things, but certainly, work with your Certified Financial Planner to make sure that you are using any vehicles that you qualify for that make sense for you. Oftentimes, health savings accounts are an example of this. If you’re eligible to contribute to one, not only do you get some tax benefit upfront from a tax deduction, you get the tax deferral on any gains that happen over the years. As long as the money comes out for qualified medical expenses, that distribution happens tax free. So, if that’s something you’re eligible for, let’s use it. Don’t leave money on the table. The other thing to think about is long term CPAs and tax preparers. Their job is to help you take a look at your tax situation and hopefully reduce your tax bill, but sometimes that doesn’t work in your favor if you’re thinking over the long run with regard to tax planning over many years or maybe even over your lifetime. Sometimes it doesn’t make sense to defer a gain. Things like traditional IRA’s or 401K’s, unless they’re being given to charity, can become a tax burden that gets passed on to the future. If you’re passing on a retirement account to a spouse, they probably are able to inherit tax free. I say probably, because I’d have to look at your account, your situations, your beneficiary designations, but retirement accounts often will just pass on to a spouse tax free. If it isn’t a spouse, the rules change and you may be passing on gains with tax liabilities that you don’t intend. It’s possible that they’ll even be in a higher tax bracket than you are. So, oftentimes using some strategies in advance like Roth IRA or doing Qualified Charitable Distributions or gifting to kids, grandkids, and other loved ones. These are all the types of things that we strategize for with clients as time goes by. One thing to think about, of course, is that we’ve got 30-something trillion dollars and counting in the national debt, and my guess is the tax rates probably are not going down. I bet you would agree with me and that doesn’t matter who’s going to be in Congress, who the president is long term, we’re probably going to see a general direction of tax rates going up. We spent a bunch of money that has to be paid for at some point, so I’m guessing that your tax rate could be going up in the future. It could be something to consider as far as using some Roth IRA or other strategies where you pay the taxes now rather than later. Sometimes paying now could be better than in the future. Sometimes converting the Traditional IRA to a Roth or accelerating some gains can be beneficial. It’s also good to have some tax diversification in your portfolio, because over the long run, we don’t know what’s going to happen. We know that the general direction of tax rates are probably going up. We also don’t know what exactly is going to happen from year to year. So there is some benefit of having different vehicles like Roth and Traditional IRAs, these different accounts that we’re able to access as well as just taxable normal brokerage accounts. Your Certified Financial Planner should be helping you with this stuff, and if they aren’t, you may want to look for somebody else. In financial services, we are tax planners by nature. We think it’s important—not just what you make, but what you keep. So we do want to make sure that’s part of the tax planning that we do in conjunction with your tax advisor, whoever that may be. If you’re doing it on your own, that’s no problem. We can certainly recommend somebody to you to help with tax advice or tax preparation. But if you continue to do it on your own, you may consider partnering with us for planning and using this to help you understand the landscape of the tax environment and the strategies available to you. I wish you a very happy tax season. Hopefully it is prosperous for you. Hopefully it is not too painful for you. As you plan for 2024 and beyond, use your Certified Financial Planner or somebody here at Keystone. We will look at all aspects of your picture. Anything we can help with, please let us know. Certainly, share these episodes out to anybody that you think they would be helpful for. Thank you for your business. Thank you for the trust that you’ve placed in my team. Have a great week and God bless. We love feedback and we’d love it if you would pass it on to me directly at josh@keystonefinancial.com . Also, please stay plugged in with us, get updates on episodes, and help us promote the podcast by rating us and subscribing to us on your favorite podcast service. The opinions voiced in the Wiser Financial Advisor show with host Josh Nelson are for general information only,and are not intended to provide specific information or recommendations for any individual. To determine what may be appropriate for you, consult your own attorney, accountant, financial or tax advisor prior to investing. Investment Advisory services offered through Keystone Financial Services, an SEC registered investment advisor