While many people have no intention of thinking about taxes after their return is filed, we believe multi-year tax planning is an underutilized tool to increase financial security. Timely & effective tax planning is the single most important and controllable factor impacting your family’s wealth. What happens in the markets may hold more sway over your balance sheet, but you have no control over the markets. How you approach your tax burden, however, is much more in your control. It is a long held HCM belief that we should control what we can and adjust to what we can’t. To that end, a multi-year tax plan can help you reduce your family’s lifetime tax burden and improve the after-tax return of all your financial decisions.
Let's consider why you should have a multi-year tax plan.
The Benefits of Planning Ahead
When it comes to tax planning, it's easy to procrastinate, thinking of it as a year-end activity to prepare for the upcoming April 18th deadline. But a longer-term strategy that considers the entire business cycle is a smarter way to go. Approaching your taxes in this manner allows you to look ahead and implement strategies and tactics that minimize your tax bill.
Following are some real-life examples of multi-year tax planning strategies HCM Clients have recently used.
- Reestablishing residency to a second home that will be sold in the next few years will turn a taxable gain of more than $400,000 into a tax-free transaction.
- A retiring client was planning to sell their business and move to Florida (an income-tax state free state). By first renting a home in Florida to establish residency, the business sale then became state-tax free.
- Volatility in the stock and bond markets has allowed clients to capitalize on large charitable deductions by transferring appreciated securities to their personal Donor Advised Funds as markets rally to expensive levels.
- The other side of the “market volatility coin” has enabled HCM clients to take advantage of depressed security prices by converting traditional IRA assets to Roth IRAs at a much-reduced tax cost. This allows future income distributions and appreciation, after a market recovery, to be received tax free. And since Roth IRAs are not subject to minimum required distributions, the tax-free Roth accounts can be preserved for future generations as an estate planning strategy.
- Buying a family beach house with the children as owners and parents providing a mortgage to help remove future appreciation from the parent's taxable estate.
- Fully funding marginal tax brackets at today's lower rates for clients who expect to face higher rates after the statutory reversion in federal tax rates in 2026.
- Those subject to RMDs often build tax payment strategies that legally delay the payment of taxes until year end without the need for making estimated tax payments. This tactic has been much enhanced by the Federal Reserve’s recent interest rate increases.
- Managing income recognition to avoid falling into the Medicare IRMAA trap.
- Bunching of deductions that can be itemized into targeted taxable years is a good way to take advantage of the “free” standard deduction the government allows all taxpayers, regardless of their actual expenses.
- Managing current income in a way that recognizes the reality for older couples that one spouse may die in the next few years causing the survivor to be taxed in a much higher bracket as a single taxpayer.
- Taxpayers who are owners of pass-through entities such as sub-s corporations and partnerships have been able to sidestep the state and local limits for much of their business-related tax burden.
- Tax planning spills over into tax-efficient investing as HCM focuses on taking only long-term capital gains unless market conditions move strongly counter to that objective.
- Capitalizing on loss harvesting made possible by downside market volatility is a regular activity as the markets fluctuate. Quick timing is important in loss-harvesting activities because markets often recover quickly, neutralizing the planning opportunity.
- Intentionally locating assets into taxable, tax deferred and tax-free accounts based on the character of income they are likely to produce.
Tax planning over the horizon is a profitable endeavor. Let the HCM Tax Department help.
| Mike Hengehold, CPA/PFS MST RICP®
Mike is the Founder and President of HCM Wealth Advisors. Over the last 30 years, he’s provided financial planning guidance to a myriad of families to help them realize their financial dreams. Mike is an avid homebrewer and animal lover, and when he’s not at work you can often find him on the golf course working on his short game.