The Art of Personal Tax Planning
How much do you owe on your taxes when the deadline rolls around? Taxes are an inevitable part of earning income, but you can minimize your expenditure with a few savvy moves. Personal tax planning is essential for tech professionals and high-income earners if they want to keep more money in their pocket and make it work harder for them.
Personal tax planning allows you to get a clear overview of where your money is right now, where you could move it for a bigger impact, and how you can minimize what you owe the government at the end of the year. It is a perfectly legal way to avoid shelling out hard-earned cash and instead putting it places to benefit yourself or others.
You will likely want to work with a seasoned professional like Consilio Wealth Advisors to get to the heart of your personal tax planning. We can take a holistic view of your finances and make recommendations that benefit you in the long run. However, there are a few things that you can do on your own too.
Here are a few ways that you can start to think about your personal tax planning here and now – well before the tax deadline starts to loom on the calendar.
Plan Ahead
When was the last time you took dedicated time to sift through your tax information? We think that proper tax planning should take place well ahead of the tax deadline in April. By the time this deadline rolls around, there may not be much you can do to change the prior years tax situation. Before the end of the year looms on the horizon, consider starting to make smart tax moves that will benefit you in the coming year.
Year-end tax planning allows you to maximize deductions through 401(k) and IRA contributions, charitable donations, and tax-loss harvesting. You can even max out accounts that have tax shelters in place such as health savings accounts (HSA) for tax-deductible, tax-free growth with tax-free distribution for qualified medical expenses.
If you have room between your projected income and the next tax bracket, you could consider completing a Roth conversion to “fill up” that tax bracket. While this strategy will add to your income in the tax year of the conversion, you may see significant benefits over the long-term by adding more tax-free money to your portfolio via Roth.
Lastly, if you make too much money to fund a Roth IRA directly, consider a back-door Roth contribution. This strategy doesn’t reduce your tax bill today, but having more savings in a tax-free bucket like Roth will reduce taxes on withdrawals out in retirement. Be careful here, there are some specific rules behind eligibility and process of completing a conversion.
Understand Your Portfolio
Knowledge plays a vital role in your personal tax planning. Prioritize getting a clear picture of your portfolio and any unique assets that will impact your taxes.
Many tech professionals are granted restricted stock units as part of their compensation package. Knowing when these RSUs will vest and how they impact your financial picture is key.
You do not need to worry about the value of the RSUs upon hiring. Taxation only happens at vest, and it’s based on the fair market value on the day your shares vest, times the number of shares that are vesting. RSUs can be taxed twice (which isn’t necessarily a bad thing), but understanding the intricacies of RSUs goes a long way in ensuring everything shakes out in your favor.
Here are some quick guides for making the most of your RSUs based on where you might work:
Tech employees will often receive stock refreshers at their annual review, which simply adds to income as those shares vest.
Common Personal Tax Planning Strategies
In addition to planning ahead and understanding the details of your overall portfolio, there are a few tried-and-true personal tax planning strategies that you can implement starting today. You may benefit from the help of a professional who can guide you through this process, but you can start to get an idea of what to do here.
Maximize Pre-Tax Contributions: Some types of accounts allow you to make contributions and to deduct those from your taxable income. This cuts back on what you owe the government in April while your money works hard for you elsewhere. Accounts that can be maximized for these pre-tax contributions include 401(k)s, IRAs, and HSAs. IRAs are subject to deductibility phase outs based on how much money you make, so be sure to look this up prior to funding.
Tax Loss Harvesting: Most people cannot accurately predict what their investments will do, both in the short-term and the long-term. Tax loss harvesting allows you to lock in your losses by selling an investment and claiming that loss against realized capital gains. If you end up having more losses than gains, you can deduct up to $3,000 from your earned income for the year. If you still have more losses left over after this, the remaining amount is carried forward into the next tax year. You can carry forward losses forever, to the extent that you don’t have gains to offset or that the $3,000 deduction uses up total losses.
Charitable Giving: Is there a charity that is near and dear to your heart? Give them a gift before the end of the year, and you can write the amount off on your taxes. This is a great way to lower your overall tax bill while making a difference in your community. Bonus, give that charity shares of highly appreciated stock rather than cash. Your deduction is based on the fair market value of the shares at the time of gift, but you avoid paying capital gains tax because you didn’t actually sell the shares. And the charity doesn’t pay capital gains either!
Asset Location: Another strategy for personal tax planning is to pay attention to asset location. Allocating different asset classes to different types of accounts balances the total taxable income generated in a year. Some assets (like taxable bonds and mutual funds) may generate more taxable income, which could be better suited in IRAs which are tax protected. Other asset classes (like ETFs or funds that pay no or very small dividends) could be held in a taxable account. You would essentially treat your two- or three accounts as a single portfolio, holding specific asset classes in the right account for tax efficiency.
Win the Tax Game with Consilio Wealth Advisors
The team at Consilio Wealth specializes in helping tech professionals like you strategize tax planning opportunities, optimize your portfolio, and minimize your tax liability at the end of the year. You’ve worked hard for your compensation, and your personal tax planning should be optimized to ensure your money works as hard as you do.
With a little advanced planning and the help of our advisors, you can maximize your earnings and minimize your tax liabilities before April rolls around. Schedule a call with Consilio today and experience the confidence you deserve.
DISCLOSURES:
The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Generally, among asset classes, stocks are more volatile than bonds or short-term instruments. Government bonds and corporate bonds have more moderate short-term price fluctuations than stocks, but provide lower potential long-term returns. U.S. Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment.
All investments include a risk of loss that clients should be prepared to bear. The principal risks of CWA strategies are disclosed in the publicly available Form ADV Part 2A.
The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
Consilio Wealth Advisors, LLC (“CWA”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where CWA and its representatives are properly licensed or exempt from licensure.
