An Investment Expert's Advice on Income Tax Planning

An Investment Expert's Advice on Income Tax Planning

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?

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