With this year’s tax deadline behind us, you might feel ready to take a break from thinking about your taxes. But it is never too soon to start reviewing your tax strategies for next year, especially as tax law continues to evolve with the economic climate. We sat down with our very own Robert Waskiewicz, Principal, Senior Financial Advisor, to discuss the tax planning strategies investors can employ year-round to prepare for the next tax season and beyond.
Q: Does the tax code change much year-over-year?
A: Generally, the tax code does not see major changes year-over-year. We typically anticipate minor changes at year end, like provisions falling out of the tax code or some getting added. Any major changes typically depend on the makeup of congress. When congress is split as it is currently, we do not usually anticipate major overhauls. The biggest change passed in 2022 was the Secure Act 2.0, which mainly impacted retirement plans.
The last big overhaul we saw was the Tax Cuts and Jobs Act (TCJA) during the Trump Administration. That is scheduled to sunset after 2025 and we are monitoring the effect that will have on the tax code. It could go a couple of ways depending on how congress is comprised – there could be a push to make the TCJA provisions permanent, or an attempt to reverse them. At this point, it is important that investors stay in contact with their advisors, as the political landscape may require the agility to implement changes with the passing of new legislation.
Q: What are some factors you might consider when developing tax planning strategies for investors?
A: There are general approaches to tax strategy that apply to everyone, but your age and living situation will be a big determining factor. At Wescott, our advisors look at a client’s full financial picture, including their current tax bracket, and if they are single or married. Then we will compare that to their anticipated future tax bracket, looking at if it is lower or higher.
What tax planning strategies really come down to is understanding an individual’s current tax bracket and projecting where they will be in the future. If you are in a high tax bracket now, you want to accelerate deductions and delay income. If you are in a lower tax bracket now, you want to accelerate income and delay deductions. Even with tax changes on the horizon, it is often clear to see where someone will be in the future and to be able plan based on that.
Q: Are there any key tax-smart strategies you recommend to investors?
A: The best thing you can do is ensure that your portfolio is set up in a tax-efficient and tax-smart manner. This means taking advantage of tax-beneficial accounts, structuring transactions in a specific way to decrease tax liability, and maximizing contributions at certain times. It is important to design your portfolio in a way that is not generating taxable income that you cannot control. A few specific tips include:
Q: How does continued economic inflation impact tax planning?
A: Inflation impacts tax planning in both direct and indirect ways. The IRS changed the federal income tax brackets for 2023 to adjust for inflation. If your income has remained relatively the same as in prior years, you are likely going to pay less in taxes. The IRS also increased the standard deduction, making tax breaks more likely for people who take it and have similar incomes as in previous years. These adjustments are built into the tax code and are standard.
We also look at how inflation impacts the market overall. While 2021 saw positive momentum, inflation forced the Federal Reserve to increase interest rates in 2022, and that had a negative impact on the market. Now, some people are paying less in taxes because their investment income has dropped. With inflation, it is important to stay up to date on tax changes, understanding how they impact projections, and then altering strategies where necessary.
Q: How do financial advisors support investors when it comes to tax planning?
A: Tax law is such a sophisticated, complicated, and intricate code to understand, and it is almost impossible to keep up with the changes if you are not a professional. There are always going to be elements of the code that you might not be aware of, but a financial advisor will be. When you work with a Wescott Advisor, you also get the brainpower of our Tax Alpha Group, which includes specialists with deep expertise in tax planning and tax code.
A financial advisor can also help you navigate the ins-and-outs of state rules, which can be highly beneficial if you have recently moved or own assets in a different state. Advisors are also a great resource to help you set goals, bounce tax planning strategies off of, and give you an informed perspective. When there is media hype around potential changes, a financial advisor can help you keep a level head and plan for how to respond if the time comes.
Do Not Go It Alone
With the ever-changing nature of tax law and growing complexities of employing tax-smart strategies year after year, working with a trusted Wescott Advisor will give you peace of mind knowing that your holistic financial plan has been specifically designed to ensure you are able to live comfortably now and into the future. Ready to learn more? Speak to a member of the Wescott Team today to get a head start in preparing for the next tax season.