Planning Matters (Summer 2019) – Continuing the Deeper Dive into Our Map of Financial Advice, Planning and Wealth Management

by David Cechanowicz, JD, MSFS, AIF®, AEP, EA – Senior Financial Planner

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In the June 2018 issue of Planning Matters, we did a deeper dive into a colorful visual aid that outlines the breadth of wealth management and planning services offered by REDW Wealth, LLC (then known as REDW Stanley Financial Advisors, LLC). Our “Universe of Financial Advice, Planning and Wealth Management” map shows the wide scope of planning services we offer in four primary planning areas: Business Planning, Estate Planning, Retirement Planning and Investment Planning or Asset Management.

At the bottom of the diagram are three additional sections we refer to as the lenses through which we view the decisions that are made in the main planning areas. Because we at REDW Wealth are fiduciaries, we must first act in our clients’ best interests. Then we measure and account for the tax impact of planning decisions; and finally, we factor in how those decisions affect risk.

In this issue, our focus is on the role of Strategic Tax Planning and what it means in the lives of our clients. The story begins, as many do, when one of our team members commented on a training session that addressed tax planning for retirement. Many of you may know that our department completes tax returns that generally are due on the 15th of April each year. What you may not know is how that expertise may be applied at other times to try and reduce or eliminate taxes where possible.

The internal discussion led me to create a preliminary list of the tax issues that we address throughout the year, which I then circulated among the tax staff for their input. We concluded that we have the combined abilities to touch almost 50 separate tax topics that may impact the lives of our clients, either as individuals or businesses. The individual strategies are divided into four major areas as follows:

  • Tax bracket and marginal rate strategies – 17
  • Planning with trusts – 12
  • Investment and asset planning for income taxation – 8
  • Business tax planning strategies – 9

For example, since many individuals approach us regarding planning for retirement, we have become experts on how Social Security income interacts with our clients’ other income, such as qualified dividends and long-term capital gains. As far as the law is concerned, most individuals understand the system of tax brackets and the concept that tax rates increase as income moves into higher and higher brackets.

That concept works well in theory, but when Social Security gets added to the tax return, strange things suddenly start to happen. Social Security is unique in that some of it is always free of income taxes (15%), and the balance of it comes onto the tax return as 50% taxable or 85% taxable.

Let’s look, for example, at how the next dollar of income will be taxed in a family where two individuals, John and Cindy, have Social Security benefits, long-term capital gains, a small pension, and retirement account withdrawals. As illustrated in the following graph, this couple has $131,000 of taxable income with a total tax liability of $7,235. Assume John and Cindy call us at REDW Wealth and ask us to send them $10,000 for a vacation they want to take at the end of the year.

The graph shows how John and Cindy’s current income situation appears on a tax map, and how the next dollar of income will be taxed. John and Cindy are poised at the junction of a massive potential increase in taxes. Note the green dot that indicates they are theoretically right on the edge of the 12% income tax bracket, but a withdrawal from their IRA will push them up and through a 49.95% Federal income tax bracket. If they live in a state with income taxes, those will be added on top of that 49.95% bracket.

In some cases a client may just have to pay the taxes. However, with good planning prior to retirement, we can assist in the creation of an income plan that looks to the future and year-by-year changes in income, especially those that occur between the ages of 62 and 71. Those years in particular usually have significant changes in the amounts and types of income that will show up on a tax return.

Our strategic tax planning before retirement looks to plan ahead for changes in income and works to optimize your after-tax income without surprises whenever possible, and long before the due date of your next income tax return. Math counts. Please call us at REDW Wealth to review any questions you may have about taxation in retirement.

Oh, and the cartoon – we’ve got that covered as well.

Photo via Conde Nast

Copyright 2019 REDW Wealth LLC. All Rights Reserved. This publication is intended for general informational purposes only and should not be construed as investment, financial, tax, or legal advice.