There’s No “I” in Taxes: A Team Approach to Tax Planning

Many taxpayers fail to benefit from the tremendous value proactive tax planning can deliver.  In this Viewpoint, tax specialist Nichole Williams partners with the investment team to discuss strategies for minimizing the impact of taxes.


As we find ourselves already in March, with April quickly approaching, taxes are likely top of mind for many of us. And as you would expect, the tax team here at Truepoint is busy preparing 2014 tax returns. What you may not know, however, is that it’s not just the tax specialists who have taxes on their minds. In this Viewpoint, we discuss how your advisor partners with our in-house tax and investment specialists to plan and implement tax strategies to maximize after-tax wealth.

Planning for Success: Identifying Opportunities

Efficiently managing taxes is about much more than simply filing a return. In fact, upfront planning is the key. Obviously tax returns are necessary and required, but they are merely a reactive reflection of the prior year’s history. A tax plan, on the other hand, is a proactive commitment to developing strategies that will minimize the tax burden over the long-term. Good planning requires both an in-depth knowledge of tax regulations, as well as a comprehensive understanding of a client’s constantly evolving individual circumstances. At Truepoint, this is a team effort and includes considerations such as:

Finding opportunities for advantageous tax deductions and credits

Throughout the year, the Truepoint tax team works closely with the wealth advisors to identify tax-saving opportunities. This collaboration is unique – and valuable – because it gets the tax specialists involved on the front end of financial decisions. For example, the tax team may learn from an advisor that a client is working on some home remodeling projects. Our team can then inform the client of energy efficient tax credits that may be available for certain home improvement purchases. Alternatively, if we know a client is charitably inclined, we can brainstorm the most advantageous ways to give. One great strategy we often recommend is to donate low basis stock to charitable organizations. This allows the taxpayer to receive a charitable deduction for the fair market value of the gifted stock while also avoiding any capital gains that would have been taxed if the stock had been sold instead.

Timing income and expenses to take advantage of tax bracket shifts year-over-year

The tax team creates multi-year tax projections, analyzing tax rates year-over-year. We can then recommend accelerating or deferring certain income and/or deductions to capitalize on the shifts in rates and tax brackets from year to year. In lower income years, for instance, it is beneficial to consider making a Roth conversion by transferring money from a traditional IRA to a Roth IRA. This generally results in taxable income in the year of conversion since the original contributions were almost certainly tax-free, so we choose to make these conversions in years with less income and, accordingly, a lower tax bracket.

A Roth conversion is just one example of proactively managing tax rates from year to year through the strategic balancing of withdrawals across taxable, tax-deferred and tax-free accounts. Additionally, now that the Net Investment Income Tax (NIIT) has come into play, it may make sense to defer or accelerate capital gains into years where taxpayers fall over or under the NIIT income thresholds.

Thoughtful Execution, All Year Round

In our December Viewpoint, Will Lundstrom talked about minimizing the impact of capital gains on your portfolio at year-end. This is only one example of how your advisor works hand-in-hand with the investment team to maximize after-tax returns. Other ways include:

Gain recognition and loss harvesting

While some taxable income items such as compensation and dividends may not be movable from year to year, other items, such as capital gains or stock option exercises can be recognized with some discretion. For example, if the investment team is informed that a client anticipates being in a lower tax bracket in the near future, they can plan to wait until the lower rate is in effect to recognize the gain. In the same vein, if the investment team discovers that there is an opportunity to harvest a loss in a client’s portfolio, they will relay this to the advisor and tax team to incorporate into future tax planning in order to maximize wealth.

Strategic asset location

Asset location is another key component of tax-efficient investing. This strategy goes a step beyond simply determining what types of assets a client should own and in what amounts, but also considers which assets should be in which accounts in order to maximize tax efficiencies. This involves managing the overall portfolio as a whole, rather than each account in isolation. As a result, a client’s Traditional IRA (which is tax-deferred), Roth IRA (which is tax-free), and taxable account will each likely hold different types of investments. For example, the most tax-inefficient assets are great candidates to be located in a Traditional IRA, where all assets will eventually be taxed at income rates. Conversely, tax-efficient assets will first be located in taxable accounts where the benefit of the efficiency can be realized. Lastly, the assets with the highest long-term expected return will be placed in the Roth IRA, where the investment can grow tax-free.

A True Team Effort

Minimizing tax drag involves more than just a good hard look during tax season; it requires upfront planning, collaboration, and frequent updates between your advisor and the tax and investment teams. While the depth of our tax services varies by engagement level, all clients benefit from our tax-focused teamwork here at Truepoint.

Truepoint Wealth Counsel is a fee-only Registered Investment Adviser. Registration as an adviser does not connote a specific level of skill or training. More detail, including forms ADV Part 2A & 2B filed with the SEC, can be found at TruepointWealth.com. Neither the information, nor any opinion expressed, is to be construed as personalized investment, tax or legal advice. The accuracy and completeness of information presented from third-party sources cannot be guaranteed.

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