Welcome to part four of my series on the financial planning process. This six-part series kicked off in May’s Investor’s Edge column. As I wrote then, financial planning is a dynamic process comprised of six steps. As you consider how best to manage your financial future, it will help to have an understanding of this process. Tax planning, an essential element of the six-step process, is highlighted this month.
Taxes are a constant. They are also a certainty, as Benjamin Franklin put it best, “…but in this world, nothing can be said to be certain, except death and taxes.”And, for the extremely wealthy, taxes are even certain at death, in the form of their estate (death) tax. So, with the constant certainty of taxes in our lives, it is simply prudent that we include tax planning in the construction of our comprehensive financial plan.
I am not a CPA (Certified Public Accountant). I am a CFP however. While there are many differences between the two professionals, a primary one is as basic as the difference between “tax planning” and “tax preparation”. Over my career as a Certified Financial Planner, I have made tax-efficient investment planning a cornerstone of my wealth advisory approach. Unlike a CPA, I cannot prepare a tax return for a taxpayer. Tax planning looks forward, seeking opportunities and strategies to reduce your tax liabilities in the future. In contrast, tax preparation requires looking in the rear-view mirror, and gathering and organizing your information from a past year, primarily for compliance with tax laws.
While the goal of tax preparation is to avoid leaving money on the table, the goal of tax planning is to have more money on the table in the first place. My hope in this article is to share some tax planning concepts that will help you with optimizing your financial plan.
Here are some tax planning strategies you might consider now and every year, not just each April as the 15th nears. By no means is this brief column intended to be an exhaustive, be-all, answer-all to effective tax planning. This important financial planning discussion cannot be summed up in such a limited space. Tax planning is as unique to an individual or family as any other component of the financial planning process.
Most of us, regardless of work status or age, can benefit from some tax planning strategies. One is “harvesting losses.” This is done in taxable investment accounts. Basically, a tax planning technique is a matter of realizing investment gains and offsetting them with realized losses to minimize capital gain taxes. Other tax planning concepts, such as timing income and deductions across different tax years, choosing the best retirement plan options, or converting IRAs and 401(k)s into “Roths”, are advisable on a case-by-case basis and highly dependent on one’s age and work situation.
Here’s another example of what I think is an effective tax planning opportunity, and unfortunately, often misunderstood, or worse yet, unknown. This is the savings plan with a “Triple Tax Advantage.” They are called “HSAs” (Health Savings Accounts). These are a type of savings accounts that allow you to set aside money on a pre-tax basis to pay for qualified medical expenses. Saving—and investing—for medical expenses in HSAs can provide valuable tax benefits. As I noted above, they can deliver a triple tax break.
First, all contributions are tax-deductible, second, withdrawals to pay qualified medical expenses are never taxed, and third, interest (gains) on savings in an HSA accumulate and compound tax-deferred. The 2019 HSA contribution limit is $3,500 for individuals and $7,000 for families. Individuals age 55 or older not yet enrolled in Medicare may make a catch-up HSA contribution of up to $1,000 per person—an amount that remains unchanged from last year’s “catch-up” limit. This means that the maximum contribution limit to an HSA in the 2019 tax year is $8,000. I wrote an article about HSAs in June of 2017 when the individual maximum contribution was $3400 and the family limit was $6750 (you also had the $1,000 catch-up allowance then). So, they have only gotten better. Nothing new here. HSAs have been around for over 15 years.
With the impacts of the Tax Cuts and Jobs Act taking full effect this tax season, 2019 may become the most talked-about tax filing time in a generation. Now is as good a time as ever to collaborate with your tax preparer professional and your tax planner professional. This will help you to optimize all your opportunities and take all appropriate new laws into account as you move forward this year and ahead.
I hope you enjoyed part four. Look for part five of the financial planning process in my Investor’s Edge column in the September issue of ALIVE Magazine.
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