Tax planning is as complicated as the ever-expanding tax code. Applying key principles can lay a foundation for more tax-efficient distributions that may prolong the sustainability of retirement assets.
Tax planning can help improve the efficiency of a distribution plan by taking advantage of tax diversification, asset location, and tax rate management. With the complicated tax code there are many pitfalls and opportunities to consider.
It is important to understand that your paid tax preparer usually provides little, if any, tax planning advice.
You might not require substantial tax planning if your financial situation is straightforward (you have a single source of income and no significant assets). Professional tax guidance, however, can save you money and hassles if you have complicated life changes, substantial investments, company interests, or several sources of income. It guarantees that you utilize all of the credits, deductions, and techniques that are available to you—and helps you steer clear of future costly errors.
Tax Planning is Helpful When You Have:
- Changes to Employment or Income:
a) Career Transitions: A higher tax rate may be the consequence of a work transition, significant wage increase, or unanticipated bonus. The impact can be lessened with careful planning.
b) Business Ownership: Proper business structure (e.g., LLC vs. S-Corp), knowledge of deductible expenses, and quarterly tax payment planning are beneficial for self-employed people or small business owners. - Investments, Capital Gains, and Stock Options
a) Selling Assets: You may be subject to capital gains taxes if you sell stocks or real estate. Gains can be mitigated by tactics like tax-loss harvesting.
b) Equity Compensation: Employee stock purchase plans (ESPPs), restricted stock units (RSUs), and stock options all have special tax ramifications that can be difficult to understand without expert advice. - Major Life Events
a) Marriage or Divorce: Your bracket, credits, and deductions may change along with your filing status. For your new circumstances, a professional can offer tax optimization options.
b) Having Children: Including dependents may result in additional deductions or credits.
c) Retirement: To save needless taxes, it is vital to carefully plan when moving from a paycheck to a pension, Social Security, and investment accounts. - Minimize Tax Liability
a) Credits and Deductions: A tax expert can point out frequently disregarded credits or deductions (such as advances in energy efficiency or education
b) Retirement Contributions: The amount of tax you pay now versus in retirement can be greatly impacted by selecting the appropriate combination of pre-tax (traditional IRA/401(k)) and post-tax (Roth IRA/401(k)) contributions. - Estate or Inheritance Planning
a) Wealth Transfer: Estate and gift tax issues can be complicated if you intend to leave large assets to your heirs or accept an inheritance.
b) Wills and Trusts: A tax expert and an estate planning lawyer can assist in coordinating plans to reduce taxes for you and your beneficiaries. - Peace of Mind
a) Keeping Up with Tax Laws: Tax laws are subject to regular changes. Professionals remain up to date on new regulations, legislative changes, and IRS updates.
b) Audit Risk: Appropriate guidance can reduce the likelihood of mistakes or omissions that could lead to an audit.