Episode 29: Tax Planning Strategies for Turbulent Times Part 3

In Part 3 of this three-part series, Brett shares several lifetime tax planning opportunities and challenges business owners are likely to encounter.

In our last two episodes, we covered some tools of the tax planning trade as well as how to deploy them for tax efficient investing. But as you know, tax planning isn’t just for your investments. Life is going to happen. And often we can’t predict its next moves. But what we can do is weave each of our life events into the tax planning fabric of our overall financial life.

So today, we’re going to talk about a few life events you may encounter over time. And each of these on their own can translate into tax planning challenges and/or opportunities.

Buying Your First Home & Starting a Family

Let’s say you first buy a home and start a family. Here you can score extra tax deductions. And you can use that extra savings perhaps to pay down college debt, contribute to an IRA, and/or establish a 529 Plan account for your newborn child.

Inheriting a Windfall

If you ever receive a financial windfall, such as an inheritance. If this happens, you’ll want to allocate a significant portion of any new wealth to tax sheltered retirement accounts. You’ll also want to seek to offset any taxable gains with any available losses.

Upgrading the Family Home

You sell that first home and buy a bigger one. In this instance, you’re going to want to keep an eye on any gains from the sale, with some caveats. The Taxpayer Relief Act of 1997 says you can exclude up to $500,000 of gains as a joint filer, and $250,000 for single filers.

Sending Children to College

If you’re like me and you just sent your 18-year-old to college well, then it’s time to tap into their tax sheltered 529 plan. And adjusting your income levels through practical tax planning may also help secure a more favorable student aid package. And what if your 18-year-old decides against going to college after all? Well, consider redirecting their 529 savings to a different beneficiary or withdrawing the assets and paying tax plus the 10% penalty. Which may not be so bad if the assets have been growing tax-free for years.

Selling Your Business & Retiring

As business owners, we sell our business. Ideally, your succession plan has been in place for years prior to position your business for a tax efficient transfer. There’s also target insurance which may help cover taxes without placing undue burden on you, your partners, or your successors.

You sell your business, and you retire. Here we’re going to plan how and when to take Social Security and any pension benefits that may be available, as well as how and when to tap into your taxable versus your tax-sheltered accounts. Once again, during low-income years, you may also plan to engage in some tax gain harvesting to reduce your overall lifetime tax basis.

Downsizing the Family Home

You downsize to a smaller home. Again, mind your capital gains. As I mentioned earlier, if you’ve lived in the home for at least two years, you should again be able to exclude gains of up to $500,000 or $250,000 per joint or single filer.

Working Part-Time in Retirement

You’re retired and you decide to work part-time. And we’re seeing this obviously more and more. But do some tax projections to determine how the extra income may impact your tax rates, benefits, and overall bottom line.

Charitable Giving

For those of you who are charitably inclined, even with the 2017 Tax Cut and Jobs Act tax code changes, tax breaks remain for the philanthropically minded. For example, you can use well timed giving to offset unusual taxable events, such as setting up a donor-advised fund in the same year you exercise a taxable stock option or sell your business or incur other significant deductible expenses.

Healthcare Expenses

Over our lifetime, we’re going to incur significant healthcare costs. And speaking of, these are large deductible expenses. You may be able to bundle high price elective procedures into a single year to take more than your standard deduction that year, especially if you pair it with any bundled charitable giving. Or if you’re not seeking a higher deduction, this may be a good time to tap tax-free assets in your HSA that have been accumulating for years.

Transferring Wealth to the Next Generation

How about if you’re preparing to pass your wealth on to heirs or other beneficiaries? The taxable implications of estate planning are extensive and really best addressed using an estate planning attorney, especially since the 2020 SECURE Act eliminated the stretch IRA. You may also want to assess whether you’d rather prioritize reducing your own lifetime taxes or those of your heirs and proceed accordingly.

Lifetime Tax Planning for All of Life’s Milestones

The big picture is all of these scenarios I’ve mentioned represent only a handful of the tax planning events you might encounter throughout your life. So, whether you’re building, preserving, or spending wealth, tax planning remains an integral part of your life. Every step of the way, each financial move you make can and should be leveraged for tax efficiencies as we’ve talked about in these episodes.

Better still, a seasoned tax planning professional can combine these parts into an integrated whole as you pursue lifelong tax efficiency. Put another way, ideal lifetime tax planning integrates seamlessly with all of your greater financial plans. Like owning your own business, this can get complicated in that we must keep an eye on each item as well as the big picture results.