No one wants to pay a larger share of their income in taxes than the law requires them to. Yet, the reality is that it’s all too easy to end up overpaying unless you have a detailed tax planning strategy in place that speaks not only to your current financial situation but also to your long-term goals. Lowering your tax liability = more financial freedom and flexibility, both now and in the future.
As a Certified Financial Planner™, I help clients implement tax strategies to maximize their wealth-building potential over time. In this blog, I’ll discuss how proper planning can make a huge difference when it comes to finding meaningful tax advantages.
I’ll also cover some key factors to consider when making changes to your financial plan over time.
3 Tax Planning Strategies for Individuals and Families
Retirement Benefits
Part of our discovery process at EP Wealth involves going through your employee benefits book to make sure you’re taking advantage of all the potential planning strategies that are built into your company retirement plan.
For instance, if you have a 401(k) or 403, there are pre-tax dollars you can save without paying taxes on it for the next 10-30 years, all while growing and compounding tax-deferred interest. Investing enough to get the full company match ensures you’re collecting that additional bonus of free money you’re entitled to.
Employee Savings Accounts
Beyond the retirement savings plan, does your employer also offer benefits like Dependent Care, Health Savings Accounts (HSAs), or Flexible Spending Accounts (FSAs)?
If you have kids in childcare or preschool, you can take pre-tax dollars, park it into a bucket, and then reimburse yourself every month or at the end of the year. These are bills you would’ve paid for childcare anyway, but you can save hundreds—if not thousands—in taxes by doing it this way. What a great hack for families! My wife and I take advantage of it every year.
HSAs and FSAs work much the same way. If you have a high deductible plan, you can save pre-tax dollars in a bucket or choose to continue paying out of pocket and invest those dollars where they get to grow tax-free for healthcare expenses in retirement.
Business Owner Tax Advantages
If you're a business owner or have a side hustle, there are a lot of great planning opportunities and strategies available. At EP Wealth, we have in-house CPAs who help our clients evaluate their situation and write off what they can from the business to save on personal tax liability.
Timetable for Financial Plan and Tax Strategy Reviews
Life situations are always changing, so I recommend setting a goal to review your tax strategy at least twice a year. All too often, I see someone "set it and forget it," and then a year later, Uncle Sam comes knocking on their door saying they under-withheld by however many thousands of dollars, and now they have to pay that back. They didn’t realize that because they got that raise last year, they need to withhold more in taxes from each paycheck.
Check Your Tax Withholding
Checking your tax withholding at least twice a year is really important—and there’s a great IRS Tax Withholding Estimator online where you can enter your most recent pay stubs and see whether you’ll get a refund or you’ll owe. That way, you can make a modification through your payroll to stay on track so you’re not surprised with a big tax bill—or get too massive of a refund when you could have been using that money throughout the year to invest or spend.
End-of-Year Tax Planning
End-of-year tax planning can be beneficial if you have taxable trusts or brokerage investments where there are capital gains or losses. For instance, last year when the stock market was down, some of our clients took advantage of tax loss harvesting, which is where you sell a holding that's technically at a loss, but we reinvest into another similar holding for 30 days to save money on taxable gains year-over-year.
In other words, it’s a strategy to shore up tax losses to offset future gains while still remaining invested.
Example of Tax Loss Harvesting
Here's one example: let's say I sell Coca-Cola for a $1,000 loss. The next day I buy Pepsi, hold for 31 days to avoid the wash sale rule, and then after 31 days, I sell it and get back into Coca-Cola. Now I’ve got that loss for the future from my sale of Coke and by purchasing Pepsi, I’m still participating in whatever happens in the soda market for one month—not just sitting on the sidelines.
How Financial Planning Can Reduce Tax Liability Near Retirement
Here’s a common scenario we see: a couple comes in—late fifties or early sixties—and they’re getting ready to retire. They’ve got a couple of adult children, and they’re looking at their assets. They’ve saved a lot in pre-tax 401(k)s and IRAs.
We know they’re going to be okay in the long run, but once required minimum distributions (RMDs) start at age 73, they’re going to have to take a couple hundred thousand dollars out that they’ll have to pay taxes on. Maybe, based on their spending patterns, they don’t need all that money at once.
So, during that window where their income has dropped in retirement and they’re in a very low tax bracket, we run projections to determine how much they can convert into a Roth IRA from their pre-tax IRA to fill up the tax bracket.
They won’t get a tax break on the front end, but all the growth in that account moving forward will remain untaxed and tax-free for their kids—because Roth IRAs have no RMDs at 73. So technically, that bucket can just be a legacy bucket for their kids. This strategy can create upwards of $3-5 million for inheritances over a 20-30 year period of time for our clients because now that money’s growth and interest is not taxed.
Also, when you’re retired, you don’t want your income to be too high, as it affects your Medicare premiums and how your Social Security is taxed.
EP Wealth Onboarding Simplifies the Process
During the onboarding process, we gather a lot of data from you—tax returns, recent pay stubs, spending charts, rental real estate income, different accounts and their tax statuses, embedded capital gains, and distribution strategies. We leave no stone unturned. Even if it's not an investment that we at EP Wealth are managing for you, we still want to know about it because it may significantly inform our overall recommendations.
Then our in-house CPAs review your tax returns and create various projections, while our certified financial planners can advise you in other related areas.
For instance, if you have a bunch of company stock—say you worked for Apple for 30 years and you have over 2 million dollars just in Apple stock. As you near retirement, you know you have a concentrated stock risk with 60% of your net worth tied up in one stock and you need to diversify, but you’d owe taxes on 1.5 million dollars in capital gain if you sold it. In this scenario, we have all sorts of strategies to sell down and diversify that stock, while also strategically mitigating taxes along the way, so you’re not just ripping off the band-aid and paying more in taxes than necessary.
Ready to talk taxes? EP Wealth’s financial planning onboarding process can get you started.
