Although we know taxes aren’t the most exciting topic, the Live Oak Private Wealth team believes tax discussion is a vital piece of the comprehensive financial planning puzzle. Taxes can be complex, which is why it’s important to use a CPA when filing your taxes.
Here are the top five things you should keep in mind as you’re discussing taxes with a professional:
1.) Tax laws have changed
The Tax Cuts and Jobs Act (passed December 2017) has been a hot topic for a good reason. It has changed several tax laws. The biggest takeaway? Your tax bracket may have changed. Additionally, your deductions might not be the same as they were in the past. It is imperative to know how the new law affects your situation so that you can maximize your income while minimizing your tax liability.
2.) Proper titling of accounts
Account titling may not be on the top of everyone’s list when it comes to discussing taxes—it slips under the radar for most people. Proper titling is critical, however. While it might not save taxes for you, it will pay dividends for your beneficiaries. For example, if you have set up a trust, make sure that you change the name of the brokerage and bank accounts to that trust. We see many situations where clients have set up a revocable trust, yet have failed to change their accounts to the trust. We also recommend checking to make sure your beneficiaries (think IRA, 401(k) and life insurance) are named and listed correctly. The expertise of an estate planning attorney can assist in making sure all accounts are properly titled so that you can minimize potential taxes.
3.) Tax loss harvesting
I was talking to a friend recently, and we were discussing a stock he owned that he had a loss in. I told him that he should consider taking a loss on position to offset other gains. One way to do this if you want to maintain the position is to buy the stock (double-up) and sell the higher basis shares 31 days after purchase. This purchase and sell trade-off allow you, as an investor, to maintain the position while realizing a loss. His immediate response was, “I wish my advisor would have made me aware of that.” I was shocked! Tax loss harvesting is something we always stress at Live Oak Private Wealth. We make sure to prune accounts for losses or gains if needed.
4.) Quick fixes
While nothing is quick or easy about taxes, there are some things to consider to help minimize your taxes. Have you maxed out your 401(k) or retirement plan? Do you qualify for a catch-up contribution (age 50 and over)? Are you analyzing what type of account (retirement or individual) your distributions are coming from? Do you gift? If so, have you utilized the annual exclusion ($15,000)? Do you have low basis stock to donate/gift? Have you ever considered gifting your IRA’s required minimum distributions (RMDs)?
To effectively manage your taxes, communication is critical. Do you have a significant gain anticipated in the future? Are you selling your business or a piece of real estate? On the flip side, do you have a loss to carry forward? Loss carryforward can help trim exposure to highly concentrated low basis stock.
In every meeting we have with Live Oak Private Wealth clients, we discuss their current tax situation. However, don’t let the tax tail wag the dog. It is essential to look at your entire picture so that we can evaluate the impact of taxes on your long-term wealth.