Broker Check

When is Tax Planning Appropriate?

| March 22, 2017
Share |

By Bill May

Having been in this profession for 30 years,I am amazed at the number of clients who have never utilized or thought about proper income tax planning. I’ve seen situation after situation where income tax planning could have saved thousands of dollars in income taxes at both the federal and state levels. This is one of many examples of why you need to have a relationship with an accountant.

Here are some examples of when tax planning should be considered:

1.  Converting a portion or all of your IRA to a Roth IRA. This would result in a taxable event that could generate substantial income taxes. Tax planning would explore your options to spread out the additional income taxes over a multi-year period.

2. Exercising stock options from your company. The IRS requires 25% federal withholding* on this type of transaction. If you are in a higher tax bracket such as 28%, 33 % or higher, this 25% withheld would not be enough to cover taxes due which are reflected as ordinary income included on your W-2. Tax planning could provide tax projections to forecast the additional income tax liability that you could face. This would allow you to plan accordingly, with no surprises the following April.

3. Selling assets such as stock that were purchased, inherited or gifted to you. Each one of these may have a different cost basis which could result in a tax liability. It would be prudent to work with your tax accountant to determine the basis and whether there would be a gain on the sale. The sale may require you to make an estimated tax payment in order to avoid any underpayment penalty.

4. Receiving a substantial bonus from your employer. You may have the option to defer the income to the following year. Once again, tax planning could assist you in making the proper decision in which year would benefit you the most with the least tax implications.

5. Receiving Restricted Stock Units from your employer. In the year that the vesting lapses and they become yours, the event would result in ordinary income included on your W-2. The basis for these shares would be the fair-market value of the stock on the day the vesting lapses. What if you wanted to sell the stock at the same time? Proper tax planning could assist you in making your decision and could provide you tax implications from the sale.

6. Tax loss harvesting. This can be a smart move any time of the year. If you sell securities for less than what you purchased them, you would incur a tax loss (either short term or long term). The maximum capital losses you can offset against ordinary income is $3,000*. Tax planning could project how excess losses could be carried forward indefinitely.  

7.Retirement tax planning. This is probably just as important as the others, but often the most forgotten. Retiring brings about many changes in one’s life, not the least is tax planning once you retire. In retirement, you may have various sources of income you will receive. Examples include: Social Security, IRA distributions, annuity distributions and investment income just to name a few. All have tax implications at both federal and state levels. Proper tax planning would help determine what would be the best sources of retirement income to draw on while minimizing your tax obligations.

“Do I have federal and state withholdings come out of my pensions or Social Security? Or do I make quarterly estimated tax payments?” These are examples of important decisions to consider in retirement and where proper tax planning could provide you peace of mind. Tax planning in retirement years may occur annually as your needs change. You may sell off investments to purchase a new car, take a family vacation or upgrade your residence. These events could result in tax implications that would need to be monitored.

These seven examples are only a few of the important factors on why proper tax planning is essential in your overall financial planning. Your accountant should be part of your financial team along with your financial advisor and estate attorney.

Want to know more? For a no-obligation consultation, fill out our Contact Us form or call 585-248-0050.



Please consult your tax advisor for specific advice pertaining to your individual situation.

* Based on 2016 tax laws.

Share |