As tax season approaches, many families focus on filing accurately and on time, but fewer step back to consider what their tax return is really revealing about their broader financial picture. Tax planning is not a one-year exercise; it requires understanding where you’ve been, where you are today, and where you expect your income and wealth to go in the future. While there is no single “perfect” strategy, there are several commonly overlooked planning opportunities that can meaningfully reduce a family’s long-term tax burden.
What stage of earnings am I in?
Determining how much you are earning and what bracket you are currently in compared to where you see yourself being in the future can dictate an abundance of decisions. One of the most common items is whether to utilize a traditional or Roth IRA or 401k. Based on your tax bracket today, is it smarter to deduct the income now and worry about taxes when you are potentially in a lower bracket or is it smart to get the taxes out of the way now? Do you have low basis funds in a brokerage account or real estate you are thinking of selling? How will these capital gains affect your AGI and tax bracket? These are crucial items to consider in your long-term tax plan.
Are you maximizing your deductions?
A family who has a combination of high property or state income tax, mortgage interest, and giving a significant amount to charity could potentially benefit from itemizing their deductions. This is especially prominent with the cap on property tax being increased to $40k for the upcoming years. If a family is itemizing for a particular year, loading charitable giving into this particular year is one consideration among the ways to take advantage of the deductions while the opportunity is there.
Should I utilize Roth Conversions*?
Roth conversions are becoming much more commonly requested topic recently, and there is a good reason for that. If the timing is done correctly, they are incredibly beneficial to the long-term tax plan. While the process of Roth conversions is beyond the scope of this article, there are a few important items to look out for. The first is determining whether this decision would push you into a higher tax bracket. If a Roth conversion pushes your marginal rate from 24% to 32%, this can be a detriment to your plan. The other item is looking at how this affects your IRMAA bracket if you are approaching Medicare age. This has a two-year lookback and is incredibly important to pay attention to in order to avoid paying more than necessary for Medicare part B.
*Converting an employer plan account or Traditional IRA to a Roth IRA is a taxable event. Increased taxable income from the Roth IRA conversion may have several consequences including but not limited to, a need for additional tax withholding or estimated tax payments, the loss of certain tax deductions and credits, and higher taxes on Social Security benefits and higher Medicare premiums. Be sure to consult with a qualified tax advisor before making any decisions regarding your IRA.
Boyce & Associates Wealth Consulting, Inc. does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
Be vigilant of timing for selling stock options or low basis consolidated holdings.
It is a common joke in the financial planning world that the home renovation industry would not be in business without stock options. This happens very frequently, when a family will exercise and immediately sell stock options to pay one-time large expenses. When a stock option holder exercises and immediately sells their position within the same year, not only does this forfeit the tax benefits of utilizing the long-term holding period, but this can also often greatly increase AGI, putting a family in a much higher tax rate for the year. Families should consider all the buckets of money and determine if this is the smartest choice.
Consider the tax equivalent yield of investment income.
Of course, nobody likes paying taxes. However, sometimes the benefit of high investment income yields outweighs the challenge of paying more in taxes. The tax equivalent yield is simply equating the yield of an income investment to the after-tax payment. You then compare that to tax free treasury rates. These yields can often be stronger than a tax-free investment, so you are still better off by using taxable income investments. However, it is important to make this decision with every investment.
While these are only a few of the countless items to look out for, these are a good start into minimizing the tax you pay over the long term. As a reminder, these items are purely educational, and you should consult with a tax professional before implementing these into your tax return. Our advisors at B&A would be happy to help analyze these strategies.
This newsletter contains general information that may not be suitable for everyone. The information contained herein should not be construed as personalized investment advice. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Boyce & Associates Wealth Consulting, Inc. does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.
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