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The Importance of Tax Planning

Welcome to another tax season unofficially in the books. I’m kidding as taxes are a year round activity. Tax planning is a HUGE part of my firm and what I offer to my clients. Let’s dive into some tax-related thoughts. This is a 4-minute read. 

Tax Season – Does It End?

  • We all know the April 15th tax deadline. Another big one just passed as the October 15th tax extension deadline has come and gone. CPAs can breathe again.
  • Starting next month is when most advisors decide it is finally time to start thinking about taxes for their clients.
  • Sadly, the end of the year is too little too late. At least in my opinion.
  • Now it is just reacting/putting out fires regarding capital gains and lamenting some tax loss harvesting opportunities that should have happened earlier in the year during market pullbacks.  
  • Tax Planning is a year-round/proactive activity. Well, at least it is in my practice. 

Importance of Tax Planning

  • Studies show good tax planning can boost investment returns for high-net-worth individuals by 2%. Think of the power of that compounding!
  • A tax-efficient withdrawal strategy can add 6 years to a retirement portfolio.
  • I regularly see studies saying 90% of clients want their advisors to do tax planning and 90% of advisors say they should do tax planning.
  • We all agree! Yet less than 1/3 of advisors review their client’s tax returns annually.
  • I’m not sure how an advisor is going to create tax-efficient retirement planning strategies or boost investment returns if they don’t look at your tax returns. 

My Tax Evolution

  • I started in this world at Merrill Lynch. I don’t recall a single trainer or senior advisor ever talking about taxes.
  • This is something I still see with potential clients who have old-school advisors at big firms – tax inefficient investment portfolios.
  • One person showed me a portfolio my software coded as “Inelegant.” He told me the official title was “Intelligent.” After reviewing the holdings I am convinced the former title was correct.
  • For my clients, we spend an inordinate amount of time on taxes and tax planning. Let me explain. 

Tax Planning for My Select Clients

  • There are three main areas I focus on with tax planning for my clients.
  • First, is the annual review of tax returns. Honestly, this is not too hard as my software does the lifting. The report it generates is great as clients always learn something new regarding their taxes.
  • While the report is great, it focuses on what already happened. Nothing too proactive.
  • The second component is where my paraplanner and I dig into the tax return, the tax return analysis report and the financial plan to create what I call the Forward Looking Tax Planning document.
  • This document is where the rubber meets the road in the sense we find actionable tax planning ideas to stop tipping Uncle Sam.
  • Most advisors don’t dive into this second step as there is no software for this. Nope, it is time consuming as it is done by hand. If most advisors are too lazy to review your tax return how many do you think will create tax planning recommendations by hand?
  • Finally, we use direct index portfolios with a heavy emphasis on taxes for those high-income clients who have taxable accounts. 

A Quick Offer

  • I promise this is not a sales pitch. It is an offer that helps me as much as anyone who takes me up on it.
  • The offer is this - Send me a quick email to dan@forwardthinkingwm.com if you have any interest in my running your 2022 Federal tax return through my tax analysis software.
  • I will then create a tax report for you. This is the first step that I mentioned above.
  • As mentioned, this helps me as the more returns I run through my software the more I learn about taxes. I mean, the tax code is only approaching 100k pages, so there is always more to learn.
  • There is no cost for this offer. Although I am limiting it to 5 people as it still takes time and resources to run the reports.
  • Again, just let me know if you want a complimentary tax report of your 2022 tax return. I promise you will learn something and hopefully come away with some ideas of how to stop tipping Uncle Sam.