By Vincent Barbera, CFP®, MSFS
For most people, April is usually not a month to be excited about or look forward to. The reason for this is because April is the time of the year when we all must file our taxes. Whether you make estimated payments or not, we all can agree that April would be received in a much better light if we could all reduce our tax bill somehow. What if I told you that there is a way that you could strategically reduce your tax bill so that April isn’t anticipated with such gloom? Enter financial planning.
Comprehensive Financial Planning
If done correctly, comprehensive financial planning has the potential to reduce your tax bill. Income tax planning is a very important piece of an individual’s overall financial plan, however, when thinking about a comprehensive financial plan, there are so many pieces to it. Depending on your needs, at a minimum, a true financial plan should cover goals, income tax planning, cash flow, risk management (insurance), investment planning, estate planning, retirement, education, special needs, debt management, etc.
When you have a financial plan that covers all of these topics within your specific situation, you can quickly see how interconnected they all are. Where tax planning becomes such a value-add for clients is when you realize that there are many different tax strategies that can be acted on within many of these different topics that encompass your financial plan. This is where financial planning gets fun and where clients can see tremendous benefits over time.
A Few Examples
If you understand the rules of the game, you will have a much higher success rate at winning the game. The same is true for understanding tax law. If you understand the tax law and the benefits that taxpayers are afforded, then when it comes to “winning the game” of reducing your tax bill, you will be that much better off.
When working with your advisor to create your financial plan, retirement planning will be a key point of conversation. Through stress-testing your plan, you can quickly see if your current retirement accounts, savings rates, and other assets are going to withstand what is needed for the retirement lifestyle that you want.
A direct way to reduce your tax bill is to contribute money into tax-deferred savings accounts. Specifically, you will see the most benefit by contributing to a 401(k) or a SEP account since the contribution limits are higher than for IRAs. This can be a substantial shelter for big earnings if you have them.
Unless you have a strong pulse on your current cash flow needs and what would be needed for your retirement, you would not be able to confidently pursue this tax-savings strategy.
Health Savings Account (HSAs)
The planning behind successfully leveraging the triple-tax savings of Health Savings Accounts (HSAs) cannot be done without thinking about the comprehensive picture. If your bases are covered and your plan allows for you to start contributing to an HSA, your tax bill, when looked at in a lifetime view, will be drastically reduced compared to if you had not used an HSA. It sounds impossible, but HSAs have no federal income tax, no state or local taxes, and no FICA taxes. The account grows tax-deferred, and when you withdraw the money, it can be used to pay medical expenses tax-free. Because this is a long-term play that only has the tax benefits if done correctly, having a comprehensive financial plan makes all the difference to successfully utilize an HSA.
Donating to charity is rewarding from the context of personal fulfillment. However, there are also tax benefits to making charitable contributions that most people that engage in comprehensive financial planning take advantage of. It is important to note that with the new tax law, the tax benefits of charitable contributions are only realized if you itemize your deductions.
When you have a financial plan, charitable contributions are mostly done in a strategic manner with the goal to realize the largest tax benefit. For example, if you wanted to give money to your favorite charity, there is actually more benefit to donating stock instead of cash. To go a step further, it also makes a difference to the tax benefit as to how long you’ve held the stock and whether or not the stock has appreciated. When looking at your investment planning and asset allocation within your entire portfolio, your financial plan is going to help guide this decision to ultimately give you the most tax benefit.
Take The Next Step
A tax-planning strategy that comes from your financial plan has the potential of providing the most tangible and real benefit to a client. That benefit is simply saving money on their tax bill in a year, possibly, but most likely in their entire lifetime. The way that such a strategy will work is if there is a comprehensive financial plan in place that covers all of the topics discussed earlier in this article. Without the financial plan, it is harder to leverage tax planning because it is so dependent on everything else working in sync together. If you’d like to take a step toward financial planning, we at Newbridge Wealth Management would love to chat with you. Click here to access our online calendar and easily schedule a free 15-minute introductory phone call. Or you can email us at email@example.com or call 610.727.3960 to schedule a meeting today!
Vincent R. Barbera, CFP®, MSFS is a managing partner and co-founder of Newbridge Wealth Management, a private financial counseling firm located in Berwyn, Pennsylvania. Believing in a patient, disciplined approach to investment management that delivers value and peace of mind, he utilizes a process-driven approach to financial planning that provides comfort and clarity to his clients’ long-term goals. Along with a bachelor’s degree in psychology and business, he has a master’s degree in business and financial planning and Certified Financial Planner™ designation. Learn more by connecting with Vincent on LinkedIn, or send him questions at firstname.lastname@example.org.