Have You Developed Your Tax Planning Strategy?
There are many facets when it comes to financial planning. While every situation is unique as a fingerprint, one constant you can count on is taxes. Based on your approach, or lack thereof, you will either pay more or less in taxes. I have yet to meet the individual who asks for assistance to pay more in taxes, but it is quite regular that folks are looking for direction and advice on how to mitigate their tax liability. This is accomplished by having a well-thought-out tax planning strategy.
Income Planning
As I see it, there are three primary areas where this attention should be placed. First, your income plan, and order of liquidation as it relates to retirement planning. This is how your assets are positioned to support and supplement your income and living needs. The type of accounts you have, when you draw on them, and to what extent will either expand or contract your overall tax footprint. This is a key area to focus on when discussing your overall plan with your financial advisor.
Investment Selection
Second, how your portfolio is invested and managed. Your investment vehicles also impact your tax situation. For example, should mutual funds be the investment vehicle of choice, you are likely going to experience a higher tax liability compared to say holding an individual stock or ETF (exchange traded fund) in non-retirement accounts. The reason being, as other investors are buying in and selling out of the fund, your tax return will be impacted. We refer to this as phantom income and could be present even if you made no changes to the portfolio or fund through the entire year. Unfortunately, this seems to be a lesser-known component to most, at least until they go to file their tax return, and it is too late to make any changes. One way to avoid this is by being particular about your investment vehicle selection. Additionally, how the portfolio is managed will also have tax implications. For non-retirement accounts, activity in the portfolio (buying or selling) will also either grow or shrink your tax liability. Portfolios with substantial activity in them generally have a higher tax liability compared to a portfolio with less trading.
Post-Death Tax Planning
Third, and lastly, your tax planning strategy should include a post-death discussion. I do not mean to come across as morbid, but this is something that is often overlooked. What do things look like for your beneficiaries after you pass? For instance, when a spouse passes, the surviving spouse will shift from married, filing jointly, to single (most likely). The single brackets are less favorable compared to the joint brackets. Pending your tax planning strategy (or lack thereof), you could be inadvertently heading down a path that creates a very challenging tax environment for your surviving spouse.
As you can see, having a tax planning strategy is paramount for every financial situation. That is unless someone has no regard for how much of their assets their silent partner (IRS) is entitled to.
This is being provided for informational purposes only and should not be construed as a recommendation to buy or sell any specific securities. Past performance is no guarantee of future results, and all investing involves risk. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. The views expressed are those of Jeff Martin and do not necessarily reflect the views of Mutual Advisors, LLC, or any of its affiliates. Investment advisory services offered through Mutual Advisors, LLC, DBA Silver State Wealth Management, an SEC registered investment adviser.
