Creating a comprehensive, tax efficient wealth portfolio is an active exercise that happens year-round.
Tax matters, especially for high-net-worth individuals who could see as much or more than 40% of their estate whittled away by estate taxes without careful forethought.
As we approach year-end, it’s a good time to consider the many ways there are to chisel away at your tax bill. There’s a lot, and the best way to capture the benefits is to make tax planning integral to your wealth management activities.
The term “tax-advantaged” refers to “any type of investment, account, or plan that is either exempt from taxation, tax-deferred, or offers other types of tax benefits.” By contributing as much as possible to all tax-efficient investments, accounts and plans, you can build wealth while minimizing risk and taxes, both now and when wealth transfers to the next generation.
Every financial decision has tax implications, leading to an endless variety of tax-efficient solutions to consider when planning your next financial moves. Some solutions are obvious while others are more obscure. Read on for highlights on some strategies you might want to consider. Feel free to contact your Wambolt Advisor on any of these strategies and learn more from our resources.
Tax credits – Historic easements provide tax incentives for private sector investments in preserving and re-using historic buildings.
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New business venture – Rollover Business Start-Up (ROBS) strategies unlock your retirement accounts for investing in a new venture, allowing your retirement account to grow alongside your business.
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Retirement planning – Qualified retirement plans, such as 401(k), profit-sharing, and defined benefit plans, accelerate savings and reduce taxes for an earlier retirement.
Stacking retirement plans accelerates savings and reduces taxes
Lessen the tax bite for a fuller retirement
Social impact investing – Opportunity zone investments, enacted as part of the Tax Cuts and Jobs Act of 2017, provides tax breaks on unrealized gains from the sale of highly-appreciated assets (stock, mutual funds, and real estate) if the profits are reinvested in an Opportunity Fund, that, in turn, invests in businesses and real estate in designated communities. The tax incentive is the deferral, reduction or elimination of certain federal capital gains taxes.
New in 2018: Opportunity Zone Investments
Succession and selling a business – Join the likes of Avis, Southwest Airlines, and other industry leaders by quantifying your ownership culture while capturing tax savings for your business through an Employee Stock Ownership Plan (ESOP). This vehicle provides tax advantages to the sponsoring company, employees, and selling shareholders in closely held companies. Additional tax incentives may be available at the state level, magnifying the tax savings. These plans cover over 14 million participants in the United States. Despite the benefits, a small percentage of U.S. companies are organized as ESOPS.
Lock down firm value for the future
Charitable giving – If you exceed the 70 ½ age threshold and are required by the IRS to take minimum distributions from their traditional IRAs, which have been growing tax-free since inception, then charitable giving may be a solution that appeals to you. Taxpayers can roll some of that required minimum distribution (RMD) into a charitable give to a qualified non-profit and take an additional tax write off.
Charitable giving in 2018 takes on a new look
Estate planning and asset preservation – Funding an Irrevocable Life Insurance Trust (ILIT) set up to own a life insurance policy can lower your estate tax bill. The estate avoids federal (and often state) taxes on the portion valued over the exemption threshold, which was $11.18 million per estate in 2018. The insurance policy also provides liquidity to your beneficiaries to cover estate taxes on the portion of your estate that is not exempt. Planning opportunities include limited time exemptions, gifts, offshore and dynasty trusts, 529 plans, charitable giving, and more.
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Bond balance – If you are in a maximum tax bracket, consider investing in municipal bonds to get a slightly better rate of return than you can with corporate bonds.
One-by-one or professionally packaged: What bonds are you buying today?
Rebalance portfolio – Allow your investments to grow tax-deferred by buying individual stocks and holding them, rather than buying into a mutual fund. All investors in mutual funds share the tax cost for mutual fund sales, which you can avoid by buying and holding individual stocks. This allows you to defer taxes on the principal for many years (taxes on the dividends and interest still apply).
Hedging market volatility with dividend-paying stocks
Integrate tax planning
All these strategies—and many more–help to chisel away at your tax bill when applied to your unique estate. The more you do proactively to reduce the impact, the better off your asset portfolio will be.
As you think about tax planning, consider the impact of each type of investment, account, and plan may have on each other. Like a puzzle, there are solutions that may need to be linked to maximize opportunities.
You’ll need financial, legal, and tax help to understand and evaluate the tax impact of your financial decisions. Look for a financial planner that can bring it all together for you with coordinated services and advice all in one place, which helps maximize benefits, convenience, privacy and efficiencies.
Year-round, proactive tax planning is an asset management strategy that if incorporated at all, is often as an afterthought. It’s time to change that mindset and integrate tax planning into your financial plan.
As an advisor, we tend to bring clients a tremendous amount of extra value by helping to define tax strategies that fit and reduce taxable estates. If any of these strategies are of interest, or you’d like a tax planning session, schedule some time with a Wambolt advisor.
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