Tax-Saving Strategies: Why Tax Planning is Important

Tax-Saving Strategies: Why Tax Planning is Important

(Part One of our three-part series)

Successfully navigating the minefield of tax planning is one of the most important strategies in creating a comprehensive financial plan. And while your tax returns may be due every April, effective tax planning requires year-round attention. Here are five things you need to know.

1. It’s a lifetime strategy.
   Being tax efficient is all about minimizing your taxes not only year by year, but over your lifetime and for the next generation. By shifting income, when possible, to years when you are in a lower bracket, you and your wealth advisors can identify when to delay income and when to accelerate income to minimize your tax burden. Coupled with optimally timed tax strategies like charitable donations and Roth conversions, you can reduce your lifetime tax liability even further.
2. Understand your ordinary income and capital gains brackets.
   It’s a basic but critical starting point: where do you fall within your ordinary income and capital gains brackets? How much room is there within those brackets? Navigating your income and capital gains brackets is a complex process that requires perspective of how your current income and tax rate environment—including anticipated RMDs (required minimum distributions) and capital gains—compare with those in your future.
3. Protect your heirs.
   Strategic tax planning can help make things easier for your family when you are gone. For example, you can choose to pay tax on behalf of your heirs so that they inherit your Roth IRA tax-free along with the accompanying growth of those funds, instead of traditional taxable IRA funds.
4. Diversify your tax portfolio.
   Make your portfolio last longer by diversifying its tax character, which increases income and tax flexibility in retirement. Tax planning helps provide more personalized portfolio management. For example, consider how you want to diversify your portfolio or change your investment objective to reduce risk and/or add more portfolio income as you age in a tax efficient way.
5. Don’t go it alone.
   As you’ll see in our next blog, tax planning is a complex minefield of potential “gotchas” that can rob you of wealth and “gimmes” that you don’t want to miss out on. Turn to a qualified wealth advisor and tax specialist about how to effectively minimize your tax burden and match your portfolio to your needs.

Rely on Washington Trust Wealth Management

At Washington Trust Wealth Management, we work with your CPA as part of your financial team to assess the short- and long-term impact of diverse tax strategies to help you make informed financial decisions. We have access to information about your cash flows, portfolio income, and goals that your CPA may not have—and we can get them information during the tax year while it’s actionable. Together with your CPA, we can be tactical in realizing income and paying taxes to minimize lifetime tax liability for you and your heirs.

Next in the series:

• Tax “Gotchas” and “Gimmes” (March 21)
• Tax-Efficient QCDs (April 11)