How Working With A Financial Advisor Can Help You Prepare For Tax Season

August 17, 2022

Ben Franklin famously said the only two certainties in life are death and taxes. You can’t get out of either of them, but you can certainly make paying taxes less painful.

The key is making tax planning a year-long conversation, not just something you do in April. Working with a Financial Advisor knowledgeable about tax planning can help you make strategic financial decisions throughout the year to reduce your tax burden. This blog outlines several strategies your Financial Advisor can help you implement into your ongoing tax planning, keep in mind all of these should be set up and planned for well in advance of the tax filing season. The earlier you talk with your financial and tax Advisor about the opportunities below, the better prepared you will be for tax time.

Maximize Your Tax Savings

Your Financial Advisor should work with you throughout the year to evaluate the optimal way for your household to maximize savings into tax-preferred vehicles. The most common strategy is to make the maximum contribution to employer retirement accounts such as 401k. But depending on your employment status and the benefits available, there may be other opportunities to take advantage of, such as Health Savings Accounts.

Beyond the workplace, there are additional tax savings accounts to leverage depending on your cash flow and family structure. Those account types are 529s for tax-efficient education savings, Traditional IRAs, and Roth IRAs for retirement and legacy planning. Taking advantage of tax-deferred accounts is a great way to save money on taxes while continuing to grow your wealth.

Proactive Tax Loss Harvesting

Taxable investment accounts provide savers with flexibility and liquidity throughout their life. Your Financial Advisor will help manage this account using a strategy known as tax loss harvesting. Unfortunately, for most investors, not every investment goes as planned. But fortunately, the tax code allows investors to offset investment gains with investment losses. So even if an investment did not lead to profits, it can help reduce the tax bill on investments that did produce profits. Throughout the year, your Advisor will monitor each investment and quickly exit positions that are not producing returns. As the end of the year approaches, they can balance capital gains with capital losses so that you do not end up with a tax bill.

Create a Thoughtful Approach for Charity and Gifts

The US Tax code does not treat all charitable donations or gifts equally. Your Financial Advisor can work with you to understand your philanthropic goals and ensure you maximize the benefit of your gifts to the causes you want to support and the tax benefits to your household. The IRS also implements limits on family gifts. Your Advisor can help design the right gifting strategies to leave your family the most tax-efficient legacy.

Maximizing the Value of Equity Awards

Many professionals receive equity awards as part of their compensation. These awards can come in several forms, Restricted Stock Units (RSUs), Incentive Stock Options (ISOs), or Non-Qualified Stock Options (NSOs). Each of these equity award structures has its own complex tax rules. Your Advisor can help you decide when to exercise or sell your options based on your tax situation and financial goals. Working with an Advisor can help you maximize the after-tax value of these awards.

Tax Efficient Distribution Strategies

At some point during your retirement, the government will require you to take required minimum distributions (RMDs) from your IRA or 401(k) retirement account. Those RMDs are subject to ordinary income tax. Your Financial Advisor can work with you to implement strategies such as Roth conversions before RMDs begin to lower your tax burden. Qualified Charitable Distributions are a strategy that might make sense for retirees who do not need the cash and want to support a charity.

This content is developed from sources believed to be providing accurate information, and provided by Pleasant Street Wealth Advisors. It may not be used for the purpose of avoiding any federal tax penalties. Please consult financial, legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.