Being the finance wonk that I am, I rather enjoy reading some of the tax advice that the big accounting firms put out for their clients. While their target audience (based on their $250 to $500 hourly fee) is clearly higher net worth individuals, you can glean some pretty useful advice from their reports.
Take Deloitte’s, Essential Tax and Wealth Planning Guide, which provides the following factors to consider in light of the looming tax law changes and potential uncertainty this will create.
I like the way the authors of the report suggest thinking about tax planning in terms of categories of income, such as investment income, ordinary income, retirement savings, and deductions. This approach provides a clearer foundation on which to focus your planning options.
Investment income: Any decision to sell capital assets should be based on economic fundamentals, together with your investment goals; however, you also should consider the tax aspects and transaction costs associated with disposing of capital assets.
If you believe capital gains tax rates will increase, there are then a number of factors and planning issues to consider before year-end in addition to the Medicare related taxes on unearned income.
Ordinary income: The economic analysis of whether to accelerate compensation (salary, commissions etc) – where possible – may be easier than the analysis involved in evaluating capital gains, as in many cases you will incur little in the way of transaction costs by accelerating compensation, and all of the compensation is taxable.
Additionally, once you realize the compensation, you can invest the after-tax earnings in alternatives that may generate capital gains or other tax-favored income.
Retirement savings: Sound retirement planning involves a range of economic and tax considerations. Most important, though, it involves consistent discipline to save. Taxpayers sometimes wonder whether they should skip making retirement plan contributions when it appears that tax rates will rise.
Keep in mind that you cannot make up missed retirement plan contributions in later years, and you will lose the potential for tax-favored earnings on that amount. Regardless of your view on the future direction of tax rates, you should consider contributing the maximum amount to your retirement plans annually.
Deductions: With respect to deductions, the key planning issue is determining in which year the deduction will generate the greatest tax benefit. Understanding this allows you to determine the most appropriate timing for deductions.
If your tax rate rises, deductions are likely to be more beneficial; conversely, if your tax rate declines, they likely will become less beneficial.
You will need to model this analysis carefully, as the impact of the AMT, phaseouts and limitations on deductions, as well as the character of the income your deductions will offset, all will have significant bearing on the result.
When Congress does address tax reform in the year ahead, there are three broad possible outcomes: an extension of current rates, or tax reform accompanied by higher rates for certain groups and elimination of various tax preferences.
Given the degree of uncertainty it is important that you closely monitor the continuing tax debate in Washington and make tax saving decisions accordingly.
1 thought on “Forward Tax Planning Through Making Smart Money Moves”
All this posturing by Congress is just that. They will reach a deal before christmas so that they can go home with their lobbyists x-mas bonuses.