Fiduciary Tax Planning Advice
Taxes are one of the largest expenses we pay over the course of our lives, but one that usually does not get enough attention. What separates Milestone from many other financial advisors is the emphasis that we place on tax planning. Our fee-only financial advisors are experienced tax planners, which includes a CPA on staff. Depending on your personal tax situation there may be opportunities to reduce the total taxes paid during your lifetime. Our fiduciary advisors monitor your tax situation from year to year to determine if there are any tax planning moves to make.
Retirement Tax Planning
Many tax planning opportunities occur during low-income years. These typically include the years between retiring from work and collecting Social Security. Another common retirement income source is required minimum distributions on your qualified retirement accounts (IRA, TSP, 401(k), 403(b)). Although you may no longer be working you still need to pay taxes, and often these are some of the best times to implement tax saving strategies that may reduce the amount of total lifetime taxes paid.
Some examples of these tax saving strategies may include:
- If cash flow permits, delay collecting Social Security to receive a larger future benefit and reduce current income for other tax planning opportunities.
- Determine whether to convert additional IRA money to a Roth for future tax-free growth and withdrawals.
- Monitoring your adjusted gross income to keep you below increased Medicare costs (IRMAA).
- Consider the possibility of taking capital gains at a 0% tax rate.
- Control medical costs and IRA distributions that pay for them so they occur in the same tax year, reducing the tax impact.
- Utilize Qualified Charitable Deductions (QCDs) for transfers from your IRA after age 70 ½.
- Consider using a Donor Advised Fund to bunch charitable deductions
Tax Planning While Working
While there are many possible tax planning opportunities after you are retired, there are also numerous considerations during your working years as well. This will depend on your personal situation and often the benefits provided by your employer. In addition to our fiduciary advisors providing recommendations on various employer benefits, they will also consider the tax implications of these benefits as well.
Some examples of tax planning while working include:
- Weigh the tax savings from making pre-tax 401(k) contributions now or contributing to a Roth 401(k).
- Assist with understanding and determining when to liquidate and exercise stock options.
- Control distributions from 529 plans and college costs so they occur in the same year, avoiding an unnecessary tax event.
- Ensure that consolidating old retirement accounts do not trigger a taxable event.
- Help make Roth IRA contributions if your income allows them.
- Emphasize asset location when investing (IRA, Roth, and taxable accounts) to place less tax-efficient investments in certain accounts when possible.
- Evaluating a back-door Roth IRA if your income is too high to contribute to a Roth IRA directly
- Consider making after-tax contributions to your 401(k) plan, if available (the “Mega back-door Roth”)
- Consider the triple tax benefits of maximizing your HSA if you have an HSA-eligible health plan
Tax Planning for Self-Employed Persons
Self-employed individuals have their own unique tax situation. For those who work for an employer, many of the benefits and tax considerations are handled directly by the company. This is not true for self-employed persons where the burden of retirement saving and tax planning (as well as running the business) fall on the shoulders of the owner. Many small business owners are not aware of, or have not considered, many of the tax planning opportunities provided in the tax code because it is not central to their line of work. Our fee-only advisors are familiar with many of the tax planning considerations for self-employed individuals and can help navigate some of our burdensome tax code.
Tax planning considerations for self-employed persons include:
- Help determine what type of retirement saving vehicle may be appropriate for your business (SEP IRA, SIMPLE IRA, Solo 401(k), safe harbor 401(k), etc.).
- Assist with calculating the necessary amount of estimated taxes to make based on that quarter's income to avoid an underpayment tax penalty (and to avoid overpaying your taxes during the year).
- Advice on various tax deductions afforded to self-employed persons, including business use of home and self-employed health insurance (including long term care and Medicare premiums).
- Help determine eligibility for certain government programs or temporary tax law changes (ex: PPP loans, QBI deduction).
General Tax Planning Guidance
Regardless of where you are in life and your personal situation, there are general tax planning considerations that apply to everyone. In the past we have seen many tax law changes, and this is something that will continually change in the future. Staying informed about these changes, and taking action on the items that apply to you, can be a lot of work. Not to mention, each state has their own unique tax rules that apply to its residents, or those who are working in one state but living in another. Part of the value our fee-only advisors provide is staying up to date about these changes for you and helping you implement any new rules that may apply to your situation.
Some examples include:
- Review new tax law changes and help our clients implement them when appropriate. The changes may be numerous during a government administration change.
- Consider state tax rules when provided tax planning recommendations.
- Help navigate the income tax rules for those working in one state but living in another (ex: Those working in MA but living in NH).
- Assist with navigating state government benefits (ex: unemployment income).