Presented by Laurence Hale, AAMS®, CRPS®
Principal/Managing Partner, Investment Advisor & Chief Investment Officer
The more you earn, the more complicated your finances and taxes tend to become. Creating an overall financial strategy that is both advantageous and tax-efficient can be daunting, but doing so can help to ensure you maximize your hard-earned income and savings while minimizing taxes.
If it looks like you’re likely to owe taxes this year, there are still some things you can do to minimize that cost. At the same time, you should look to put strategies in place to make sure you protect your finances and avoid overpaying in taxes in years to come.
First, build your team of professionals.
Unless you yourself are an accountant or a financial advisor, you very likely don’t have all the knowledge and expertise you need to navigate the complicated tax code or make the most of your money.
Building a financial team to tackle your taxes and create a long-term financial strategy for your family is well worth the investment. This team usually consists of a CPA (certified public accountant) and a financial advisor. Ideally, these professionals will work well together with you and each other. At Weiss, Hale and Zahansky we pride ourselves on taking a strong partnership approach with our clients and their tax professionals to ensure a cohesive plan is in place that best serves each individual’s unique nancial needs and personal goals. When choosing professionals to work with, seek out that same level of care, attention and partnership.
Next, choose your tax strategies.
Once you have the right team of financial professionals who understand your financial situation, here are some tax-saving investment strategies you and your team may consider using this year.
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Backdoor Roth IRA:
If you’re a high earner with an income above the IRS’s limit for Roth IRA accounts, you still have the option to create a backdoor Roth IRA. This option allows high earners to bypass the income limits and still utilize the tax advantages of a Roth IRA account. Another long-term benefit is that Roth IRAs do not have required minimum withdrawals like traditional IRAs do.
When considering a backdoor Roth IRA, be sure to evaluate the tax obligations you might pay today versus the tax benefits you may realize toward retirement. This strategy can be highly effective for creating tax-free income in retirement, but it’s also quite complex. So, it is important to understand the rules for using this strategy and whether your particular circumstances would make it benecial.
The annual gift tax exclusion gives you a way to remove assets from your taxable estate. You may give up to $15,000 ($30,000 if you are married) to as many individuals as you wish without paying federal gift tax, so long as your total gifts keep you within the lifetime estate and gift tax exemption ($11.7 million for 2021). Managing through the annual gift tax exclusion can involve a complex set of tax rules and regulations, however. Before adjusting your strategy, consider working with a professional who is familiar with them.
If you make a charitable gift of appreciated securities that you have held for at least a year, you may be eligible for a tax deduction for the fair market value of the asset in the year of the donation.
Tax-loss harvesting refers to the practice of taking capital losses (you sell securities worth less than what you first paid for them to help offset the capital gains you may have recognized. Keep in mind that the return and principal value of securities will fluctuate as market conditions change and past performance is no guarantee of future returns. While this doesn’t get rid of your losses, it can be an approach to manage your tax liability.
Up to $3,000 of capital losses in excess of capital gains can be deducted annually, and any remaining capital losses above that can be carried forward to potentially offset capital gains next year. Just remember that tax rules are constantly changing, so there is no guarantee that the treatment of capital gains and losses will remain the same in the coming years.
Before moving ahead with a trade, it’s important to understand the role each investment plays in your portfolio. If you’re looking into this strategy, familiarize yourself with the IRS’s “wash-sale rule.” This rule indicates that investors can’t claim a loss on a security if you buy the same or a “substantially identical” security within 30 days before or after the sale.
With these strategies, you may be able to address both your current tax obligation and those of future years. That’s the good news. The not so good news is that navigating taxes can be difficult, and even more so when considered as part of a comprehensive and strategic financial plan.
Feel free to reach out to us at Weiss, Hale and Zahansky for help in building a tailored strategy designed to help you navigate these critical challenges with confidence. In the meantime, learn more about our strategic Plan Well, Invest Well, Live Well process and check out our helpful tax, retirement and other financial calculators and resources.
Presented by Principal/Managing Partner Laurence Hale AAMS, CRPS®. Securities and advisory services offered through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Weiss, Hale & Zahansky Strategic Wealth Advisors does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice. 697 Pomfret Street, Pomfret Center, CT 06259, 860-928-2341. www.whzwealth.com.