If your only tax strategy is filing by April 15, you’re missing long-term opportunities. Proactive tax planning goes beyond annual compliance—it’s a powerful strategy to pursue income and reduce taxes throughout your lifetime.
Luke LaRock, NSSA®, Associate Wealth Advisor at Pinnacle Wealth, recently shared his insights on the importance of tax planning. He discusses the “how” and “why” of working with financial advisors and your CPA to help achieve the best results possible. Let’s break down the actionable tax planning strategies from his discussion to help you optimize your finances.
Tax Planning 101
At its core, tax planning strategies are about partnership and long-term vision. Luke LaRock explains, “We’re not here to replace your CPA; we’re here to collaborate with them.” Most financial decisions have potential tax consequences, and ignoring this aspect is like “flying blind.” Tax Planning, similar to budgeting, usually appears on a list of things we know we should do but don’t want to do. At the end of the day, it’s all about increasing awareness, so ask yourself, why wouldn’t you want additional awareness? With proper strategizing with a trusted advisor, you could accomplish the following:
- Enhance your giving with Qualified Charitable Distributions or Donor Advised Funds.
- Convert traditional IRA dollars in low-income years to create tax-free growth for the future.
- Confirm proper reporting for IRA distributions, Roth conversions, and qualified charitable distributions. Converting from a traditional IRA to a Roth IRA is a taxable event.
- Verify that dividends and interest income align with your financial accounts in a tax-efficient manner.
- Find valuable tools like capital loss carryovers for offsetting gains.
- Identify potential opportunities for reducing one’s lifetime tax bill, or simply reassure you are operating as tax-efficiently as you can.
The goal, as Luke says, is to “identify areas where we can proactively save you money over your lifetime—not just for this year”.
Key Tax Strategy Opportunities
Your tax return can reveal opportunities to optimize your finances. Luke emphasizes, “Tax returns can give us a map, pointing out income-based strategies and tax-saving opportunities.” Let’s dive into the standout approaches he highlighted.
Implement Income-Based Tax Planning Strategies
- Realizing Capital Gains at a 0% Rate: Depending on your taxable income, you may qualify to realize some gains without any additional tax liability.
- Roth Conversions: Lower-income years may be a great time to convert traditional IRA funds into a Roth IRA.
- Portfolio Rebalancing & Asset Location: Strategically adjusting your portfolio and ensuring tax efficient investments are being utilized across various accounts could save you taxes over the long run.
Gain Tax Efficiency in Retirement
- Spotting Over- or Under-Withholding: Luke notes that it’s vital to evaluate whether taxes withheld on IRA distributions are adequate since miscalculations can lead to penalties or a large refund, which is essentially an interest free loan to the government.
- Strategic Distribution Planning: Aligning distributions with lower tax brackets can help retirees save thousands over time.
Avoid Common Surprises
- Social Security Taxation: Up to 85% of your Social Security income could be taxed based on your income. This can be a surprise to many retirees, leading their own projections astray.
- Phase-Outs for Contributions: “Many don’t realize that as your income grows or you have a larger income year, you may have phased out with eligibility to make Roth IRA contributions until it’s too late,” explains Luke. Alternative strategies like backdoor Roth conversions can help in some instances but shouldn’t be implemented without a full review of your assets to avoid penalties and additional taxation.
- Medicare Premium Threshold Brackets: Without proper planning, higher income years can unintentionally subject you to higher Medicare premiums.
Can I Collaborate With My CPA on Tax Strategy?
Yes! Tax planning strategies are most effective when they’re collaborative. “We see CPAs as partners,” Luke explains. Not all, but some CPAs, or Certified Public Accountants, focus primarily on reporting what happened over the past year (the rearview mirror analogy), and sometimes might not have the time and bandwidth to proactively plan, so financial advisors can help bridge that gap if it exists and help clients look forward to the future to create long-term strategies.
For example, advisors like Luke will provide written summaries for actions such as Roth conversions or qualified charitable distributions to help ensure they’re recorded accurately by the CPA. The goal, he says, is to “ensure clients don’t overpay the IRS over their lifetime and not just for a single year.”
Making Tax Returns Understandable (and Useful)
If you’ve ever found tax returns overwhelming, you’re not alone. Luke acknowledges, “When I first started, I found tax returns intimidating. They were hard for me to understand.” To bridge this gap for advisors and clients alike, financial teams at Pinnacle Wealth use software like Holistiplan to create a distilled tax summary report.
What is a Tax Summary Report?
This report consolidates key elements of your tax return into a digestible document covering:
- Marginal vs. average tax rates.
- Refunds vs. amounts owed (and whether they align with estimates).
- Key impacts, including Social Security taxation, capital gains, deductions, and bracket thresholds.
These manageable insights let our financial advisors turn your intimidating tax return into a useful tool for planning.
When to Share Your Tax Returns
Ideally, Luke suggests sharing your tax return with your advisor each spring, since tax documents are fresh in hand. For those who file tax extensions, fall is also an option. The key is consistency, so your tax return is regularly integrated into the financial planning process.
Why Routine Tax Reviews Are So Important
Luke illustrates how routine tax reviews can make a tangible difference. “We’ve had instances where clients weren’t expecting higher income years, and they accidentally contributed to a Roth IRA while being phased out of their eligibility to do so.” By catching the return in time, they avoided penalties by redirecting the funds appropriately.
The Right Guidance Can Increase Your Confidence
Tax planning strategies can seem overwhelming at first, but the right guidance could simplify the whole process. Financial teams like Pinnacle Wealth make tax planning accessible, from summarizing dense documents to offering personalized insights.
“The biggest benefit of using tools like Holistiplan is making something useful that’s normally intimidating,” says Luke. Whether it’s understanding your tax brackets or planning for future income strategies, we help empower clients with clarity, awareness, and actionable solutions.
Take Control of Your Tax Planning Strategy With Pinnacle Wealth
Your tax return is more than a compliance document; it can build you a stronger financial future. Pinnacle Wealth offers tax planning as part of our holistic approach to wealth management. By working with our trusted advisors, you can unlock opportunities to save money and minimize stress.
Are you ready to make smarter decisions with your taxes? Connect with Pinnacle Wealth today to transform your financial outlook.
