Value of Tax Planning

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For the past few weeks we have been busy meeting with many of our clients for year-end reviews and tax discussions. We strongly believe that proactive tax planning is a major part of Gordian Advisors’ value proposition (or working with comprehensive planners in general). It is especially true in 2018 as we work through the TCJA tax law changes (see prior post). After doing dozens of planning sessions, I wanted to summarize some of the opportunities and pitfalls that come up over and over again.

This is a pretty technical discussion, so don’t worry if you get lost in the weeds. If you are a client we have either met in person, communicated through email or internally reviewed your situation already. Do let us know if you have any questions or have thought of any other strategies that might apply to your situation. And if you are not a client, maybe you should become one  🙂

Everyone should review their tax situation at the end of each year to see if there are any planning opportunities. However, the set of available strategies largely depends on your employment status. For W-2 employees such opportunities are often limited, but do include reviewing retirement plan contributions (pre-tax and/or Roth), benefits elections, and stock option strategies. Business owners or self-employed individuals should look into the new 20% QBI deduction and a selection of retirement savings plans (i401k, SEP, Simple, PSP, etc). The real tax planning sweet spot is largely available to Retirees, particularly in the early years.

Below is a checklist that you or your advisor should go through this year, it’s not exhaustive but covers most major points.

Everyone

  • Review deductions – with higher standard deduction ($24k+ for MFJ), elimination of miscellaneous category and $10,000 SALT cap few clients will itemize in 2018.
  • Plan charitable contributions – including bunching, Donor-Advised Funds, and AZ state credits
  • Tax loss harvesting – this year it made sense for some clients where we took losses on foreign stock and [uncommonly] bond funds
  • Don’t forget about year-end mutual fund distributions in taxable accounts – these can reach 40% of value in rare cases, but the highest ones we saw for our clients were in a 10% range. It might make sense to sell such funds before the distribution, or at least don’t buy in right before it. We have contacted clients with significant impact.
  • IRA/Roth contributions – these can be made up until April 15 of next year
  • 529 contributions – Arizona offers a state tax deduction for up to $4,000 in contributions

Retirees

  • My tax-wise definition of “Golden Years” is the first few years of retirement when you no longer have wages, but before you take Social Security and RMDs. As a result you are likely in a very low tax situation which opens up some bracket top-off opportunities such as:
    • Capital gains at 0% tax – bring up your cost basis, rebalance or raise cash for future distributions
    • Roth conversions – might make sense if you are in a low tax bracket that will increase in the future
  • Double-check total marginal rate – there is a narrow area where interplay of capital gains and regular income creates a tricky triangle of 27% marginal rate. This happens when regular income at ostensible 12% pushes out capital gains from 0% to 15% thus creating 27% rate. This came up several times this year and we recommended against additional IRA distributions. Conversely, doing a QCD (see below) in that same space would lead to 27% tax reduction!
  • Medicare premiums (Part B and D) depend on your income, so reducing AGI (QCD anyone) can lead to substantial savings.
  • Social Security taxation – proportion of your retirement benefit that is taxed (from 0% to 85%) depends on your income
  • If you are over 70 1/2 make sure you take RMD for the year – nobody wants to pay 50% penalty! (all our clients are good here)
  • Related to RMD is QCD – it gets technical but basic premise is that you can send part of your required distribution directly to a charity. It reduces your income and taxes but may also favorably impact Medicare premiums. It’s “above the line” item unlike regular charitable deductions. Moreover, you can take a standard deduction and further benefit from charitable contributions. We discussed this strategy with most clients who qualify, but let us know if this sounds interesting.