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tax planning from an investment perspective

An Investment Expert's Advice on Income Tax Planning

Apr 10th 2019
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Income tax planning is a year-round and continuous evaluation for your clients. Although their tax returns are not due until April 15, without extensions, it is important to make sure you assist them throughout the year. A little extra help will save you hours of work and time spent on last-minute explanations. It will alleviate your clients’ tax burden, too.

There are several things you can review with your client to make sure they are making the most efficient use of their investable assets.

First, look at investment accounts that can provide a tax deduction. It is easy to see from their previous year’s W-2 if they are taking advantage of their company’s retirement plan and to what degree. It may make sense for your clients to increase their contributions in order to lower their income tax liability and, concurrently, help them increase their retirement savings. Those who do not have a 401(k) or company retirement plan should explore the possibility of using an IRA in a similar manner. 

Utilizing different types of retirement savings vehicles makes sense, too. It is important for your client to understand that all of the money they are saving tax-deferred toward retirement will be taxable in the future when they withdraw it. In light of this, it might be better to utilize a Roth 401(k) option, if available to them, or a Roth IRA, which would enable them access to funds in retirement that would not be taxable. By taking advantage of both forms of savings, they’ll have the flexibility down the road to control their income taxes a bit more.

In addition, it is also important to have investment accounts that will allow you access to your money at any time without penalty, unlike most of the retirement accounts mentioned thus far.  Investments accounts can generate different forms of taxable income, and your client should have a basic understanding of what they are and how they work. 

Simple things like holding their investments for at least 12 months and one day will turn a short-term capital gain into a long one, which can mean a significant tax savings. How many times have you seen a client sell an investment a few days before they reach that threshold, only to pay significantly more in taxes for no reason, when there was no imminent need to sell?

Furthermore, mutual funds should be reviewed carefully, as they can produce taxable income and capital gains. It is especially important to know when they will be distributing the latter.  We have seen clients purchase funds in early November, only to receive a significant capital gain distribution when they have only owned it for a few weeks. In these cases, it may make sense to wait to make the purchase or buy an equivalent that has no distribution scheduled.

Additionally, make sure your clients have the right investments in the right accounts. It would be ideal if they could place investments that would have the highest tax implications into their tax-deferred accounts. This would help their income tax situation for the year.

Lastly, your clients should be reviewing their accounts on an annual basis (I recommend doing this around November) to see if there are any opportunities to harvest tax losses. As the end of the year approaches, it is important to see if there are ways to mitigate their income tax liability for the year. We know clients do not necessarily like taking losses, but many times, they make sense. Should your client feel really convicted about the holding, they can always double up the position 30-plus days before the end of the year and, on day 31, sell the initial lot for the loss.  This will provide them with the opportunity to capture the loss and still own the position while participating in the upside potential of the holding.

Your clients, with a little planning, can significantly help their income tax position each year. Helping them  will raise your standing and elevate you to their most trusted advisor.

This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.

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