How a Financial Advisor Can Help Lower Your Tax Bill

Careful tax planning throughout the year can put more money in your pocket      

Tax planning is a vital part of any wealth management strategy, but reducing your tax burden isn’t always a straightforward process, especially for individuals with more complicated returns. Careful planning can help minimize your tax liability leaving you with more money to further your financial goals.

Tax planning isn’t just something you think about when filing, it requires year-round attention if done properly. Surely, your accountant should play a large role in this, but consider working with a financial advisor who can recommend tax-efficient investment strategies as well.

What is tax planning?

Tax planning involves examining your finances holistically and incorporating strategies to reduce your overall tax bill through careful planning around income, purchases, investments, and strategies like tax-loss harvesting.

Strategic tax planning can also help maximize your estate and provide more flexibility for your heirs. For example, as part of your tax plan you might hand off portions of your wealth to family members as tax-free gifts or establish an irrevocable trust to reduce the federal tax burden for those who inherit your estate.   

How can a financial advisor help?

As part of an overall plan to manage your wealth, many financial advisors will offer tax planning services, which may include:

• Charitable giving strategies. The amount and timing of charitable giving can have an impact on your tax bill. A financial advisor can help you determine when and how much to give so you can deduct your charitable contributions from your adjusted gross income. An advisor may help you time gifts to charity so deductions can offset other big taxable events, like a financial windfall, a salary raise, or a large bonus at work.

• Tax-loss harvesting. An advisor can help you determine when to sell investments that have lost value to realize capital losses that can be used to offset taxable gains. Your advisor can help you use proceeds from the sale to reinvest in similar securities with upside potential.

• Choosing tax-efficient investment vehicles. A strategic tax plan will consider the impact of contributions to tax-deferred savings accounts like 401(k)s, 529 education plans, and health savings accounts (HSAs). Some plans—like traditional 401(k)s, traditional IRAs, and HSAs—provide an immediate benefit by allowing you to reduce your taxable income. Contributions to 529 plans aren’t tax deductible, but investments inside the account grow tax-free. Withdrawals made to cover qualified education-related expenses are tax-free as well. A financial advisor can help you plan contributions to tax-deferred accounts to minimize what you owe in taxes.

• Multi-Year tax planning. The most effective tax plans go beyond annual strategies and look ahead to your long-term financial goals. An advisor can help you put together a multi-year plan to reduce your tax burden in the long run. For example, they could help you bank capital losses to offset a future taxable even, such as the sale of an investment property.

Tax planning involves a lot of moving parts from annual adjustments to IRA contribution to charitable deductions to staying abreast of local tax laws. Working with a financial advisor on year-round tax planning can help ensure you’re maximizing tax deductions, taking advantage of tax credits, and using tax-efficient investment vehicles effectively. An advisor can help ensure you don’t miss any opportunities to reduce your bill and will keep up with regulatory changes, making any necessary adjustments to your plan.

Any opinions are those of the author and not necessarily those of Raymond James.  This material is being provided for information purposes only and is not a complete description, nor is it a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. As with other investments, there are generally fees and expenses associated with participation in a 529 plan. There is also a risk that these plans may lose money or not perform well enough to cover college costs as anticipated. Most states offer their own 529 programs, which may provide advantages and benefits exclusively for their residents. Investors should consider, before investing, whether the investor’s or the designated beneficiary’s home state offers any tax or other benefits that are only available for investment in such state’s 529 college savings plan. Such benefits include financial aid, scholarship funds, and protection from creditors. The tax implications can vary significantly from state to state.

Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.  Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification, tax loss harvesting and asset allocation.  Prior to making an investment decision, please consult with your financial advisor about your individual situation.