A Tax Upon Your House

A Tax Upon Your House
Tax planning is the cog in the financial planning wheel
By Anthony Pellegrino

“I am proud to be paying taxes in the United States. The only thing is I could be just as proud for half of the money.”
—Arthur Godfrey

THERE’S MUCH talk about taxes every April, as we look back on what we made and spent the year before and settle up with the tax man. Many of us sigh with resignation as the accountant shows us the number to write on the check.

It doesn’t have to be that way. Sure, you’ll always owe taxes; it’s the American way. But there are steps you can take to reduce your liability and keep more money in your pocket.

In previous articles, we’ve talked about investment planning and income planning. While these are important, tax planning is the cog in the financial planning wheel: It engages with all the other pieces to set the plan in motion and keep it running smoothly.

Tax planning shouldn’t be confused with tax preparation, that flurry of activity every April as we look back over the previous calendar year. Instead, tax planning is forward-looking, creating a proactive strategy that considers your tax issues throughout the year.

Looking Back, Looking Ahead
Creating a tax plan is essential, but it has one big drawback: We can’t predict what changes will be made to the tax code by the time we hit retirement age. Last year’s Tax Cuts & Jobs Act reminded us that tax brackets move and rates shift.

What we do know right now is that the 2017 Act is set to remain in place until it expires in 2025. Our highest marginal rate is currently at 37%, a reasonably conservative rate when you consider rates of the not-so-distant past:

Year      Top Marginal Rate
1995      39.6%
1985      50.0%
1975      70.0%
1965      70.0%
1955      91.0%
Despite our inability to foresee changes, every taxpayer can benefit from a strategy that hedges against the possibility of increased tax rates and explores available tactics for reducing their tax bill—both today and in retirement.

The Tax Planning Process
When crafting a person’s unique strategy, we ask
these key questions:

1. What is the taxable nature of your current holdings? When you meet with a new patient, you most likely do a thorough initial exam. Tax planning begins the same way, with a comprehensive review of all your investments and retirement accounts, pinpointing how they’re taxed now and how they’ll be taxed when you start taking distributions.
2. Are there ways to include tax-deferred or tax-free money in your plan? Depending on your goals, you may be able to rework your accounts to take advantage of different tax structures. If you own a traditional IRA, your retirement portfolio might be strengthened by converting it to a Roth IRA. Converting to a Roth might mean you’ll pay less in taxes during your retirement years, when tax brackets and rates are potentially higher.
3. Which retirement income accounts should you access to potentially reduce your taxes? Distributions from your retirement accounts may be taxable depending on their taxable nature. We look at how to minimize your taxes and maximize how much you keep by strategically taking the right mix of distributions from your various holdings.
4. How will selling specific investments impact your taxes? Capital gains are realized when you sell an investment at a profit. Short-term gains are taxed at much higher rates than long-term gains, an important factor to consider before selling an investment. In certain situations, you might consider selling an investment at a loss, potentially reducing your taxable income. A tax plan can help uncover if these tactics might work for you.
5. How can you leave money to beneficiaries without saddling them with a large tax bill? You want to leave your assets to loved ones, not to Uncle Sam. Tax planning ties in with legacy planning as we look for ways to efficiently pass funds without sacrificing a big chunk to taxes.

If you have questions about how you can potentially reduce your tax bill, we can help. Call us at 630-620-9300 to schedule a meeting to discuss your goals and discover how you might benefit from a holistic financial plan.

Anthony Pellegrino is the principal of Goldstone Financial Group. As seen on CBS 2 Sunday mornings as the co-host of “Securing Your Financial Future.” Visit goldstonefinancialgroup.com for more information. Investment advisory services offered through Goldstone Financial Group, LLC, a Registered Investment Advisor.