As the 2015 tax return filing deadline approaches, many people understandably want to know how they can minimize their tax bills. At Truepoint, we help achieve that goal by asking a series of questions throughout the year. It’s part of our integrated approach, which is designed to ensure that investment, financial planning and estate planning decisions take into account potential tax implications.
Given the importance of minimizing taxes, the following are some of the questions we ask so you don’t have to.
1. Are there portfolio adjustments that can help reduce taxes?
Strategic asset location – which involves placing tax-inefficient assets in tax-deferred or tax-exempt accounts – is one proven step for reducing the tax drag on investment portfolios. Similarly, tax-loss harvesting can be a big help. By deciding to take losses on some investments, you can offset taxable gains on other assets.
Another often overlooked approach entails the proactive monitoring and management of capital gain distributions. These distributions occur when shareholders receive net gains realized from underlying holdings in a fund in which they are invested. Truepoint tracks the dates of these distributions, which must be announced in advance, and times fund purchases and sales accordingly.
2. What is the best timing for income recognition?
At Truepoint, we integrate all specialty areas to proactively manage tax rates from year to year. One way is through the strategic balancing of withdrawals across taxable, tax-deferred and tax-free accounts. We also evaluate the opportunity for Roth IRA conversions. Transferring money from a traditional IRA to a Roth IRA generally results in taxable income in the year of conversion since the original contributions were most likely tax-deferred. Thus, these conversions are optimally timed to occur in years with less income and, accordingly, a lower tax bracket. Additionally, while the impact on taxable income is not the deciding factor in determining the best time to exercise stock options, it is an important consideration.
3. Have all appropriate deductions been claimed?
In our experience, deductions are easily (and frequently) overlooked. We keep an eye out for unique deductions that may be available to you. For instance, home remodeling projects often present the opportunity to take advantage of energy-efficient home credits.
Good timing can also help you max out your deductions. For instance, you may be advised to pre-pay mortgage payments (e.g., paying your January mortgage in December) and state and local taxes before the end of the year to take advantage of those deductions in a higher tax year. Similarly, accelerating planned charitable contributions is another way you can bring forward the benefits – both to your tax liability and the organizations and causes you support.
4. Are there particularly advantageous tax planning techniques available?
Donating appreciated stock to charitable organizations is a highly effective way to reduce your tax burden. Donors generally receive a charitable deduction for the fair market value of the gifted stock, while also avoiding the tax on the capital gain if the stock had been sold.
Furthermore, if you wish to make a charitable gift and are older than 70½, a Qualified Charitable Distribution from your IRA can satisfy the required minimum distribution requirement (RMD), exclude the otherwise taxable RMD from your adjusted gross income and benefit your charity of choice.
5. What steps can be taken throughout the year to stay ahead of tax issues?
There are big-picture and long-term concerns to bear in mind throughout the year. This is why we complete multi-year tax projections. By analyzing applicable tax rates across multiple years, we can help clarify decisions around accelerating or deferring income and/or deductions.
Year-round planning is especially valuable, because a comprehensive tax plan can cover a myriad of issues, including the sometimes negative impact of the Alternative Minimum Tax on tax planning strategies. It’s important to remember that a single year’s tax return is a snapshot of what has already happened, whereas a comprehensive plan can shape future tax obligations and minimize the overall tax burden, across multiple years.
No two tax plans will be the same, since they are a function of individual and family circumstances and goals. Because these evolve over time (as does the tax code), you need an integrated team that understands and stays on top of both your personal wealth management needs and the changes in tax rates, rules and regulations.
Your Truepoint team is focused on these questions throughout the year so that as the filing deadline approaches, there aren’t too many questions left for you to ask.