Protecting Future Wealth Through Tax Planning Today

Taxes & Tax Planning | InspireHer: Plancorp Women’s Initiative | Tax Strategy

 Susan Jones By: Susan Jones
Protecting Future Wealth Through Tax Planning Today
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Protect Your Net Worth with Tax Planning Strategy

Taxes are an inevitable part of life, but that doesn't mean you have to let them steal your future. With proper tax planning as a part of your holistic financial plan, you can protect your family's finances and make the most of your hard-earned money, even as a high net worth individual. Unfortunately, many people don't think about tax planning beyond their obligation to report their earnings to the government. This is a mistake, particularly for high income earners, because tax planning for high net worth individuals can avoid missed opportunities to minimize taxes and preserve wealth.

Tax planning matters, and careful attention to future tax liabilities can either benefit your family's net worth or significantly damage it. For example, a client of mine waited to sell their former home until several years after moving into a new one. They rented the house off and on, which helped cover their expenses, but they were slow to put it on the market. Unfortunately, because they did not think through the tax implications, they ultimately sold outside of the window when the $500,000 home gain exclusion would have applied. As a result, they ended up paying almost $160,000 in taxes that they wouldn't have needed to pay had they sold the property a year earlier.

Another time, a client donated a large amount of stock that had previously been restricted to charity, but falsely believed that the original grant date of the restricted stock started the holding period. When I began helping with their financial planning, I discovered that the donated stock actually had short-term holding period, which reduced their donation value to their cost basis and ultimately cost them six figure of tax savings. Not only is that a big deal in the moment, it can make a big impact for future beneficiaries. I share these examples to make vague or seemingly complex tax rules more applicable to your daily life or future plans. You can either work with a professional to pay attention to taxes now or run the risk of it costing you not only what you pay, but the growth those funds could have seen invested in your future.

Managing Tax Liability and Protecting Your Net Worth

Now that we've covered why tax planning is important, let's go over some tips that you can implement into your tax planning strategy so you can better manage your tax liability and protect your family's finances:

  1. Taxes on Retirement Accounts
    Watch out for taxes on retirement accounts. First, consider the tax implications of retirement plan options such as 401(k)s and Roth IRAs. Though many people are savvy about contributing money into a retirement account, they do not know the most tax-efficient methods to draw from retirement accounts, a mistake that can wipe out gains overnight. There is also planning that can be done in the interim, like Roth conversions or other marginal rate tax planning to consider.

  2. Taxes on Stock & Equity Compensation
    Don't let capital gains taxes drain your stock values. Taxes can also have a major impact on equity compensation planning and non-qualified deferred compensation planning. Pay attention to alternative minimum tax planning (for incentive stock options), and work to determine the optimal exercise time for your options. With all stock acquired through equity compensation grants, deciding when to sell stock can be a complex decision. So, make sure you include tax planning and diversification considerations in your strategy.

  3. Taxes on Home Equity
    Protect your home equity against excessive taxes, particularly if real estate is a large part of your net worth. Determining how and when to purchase a home (both primary and vacation homes) is a planning item at the top of many people's lists but often doesn't get enough attention beyond a flat "can I afford the monthly payment" level. When you move beyond basic financial advice into true wealth management, your advisor will make sure you understand the tax implications of your homeownership plan, such as the mortgage interest deduction and the home gain exclusion. This becomes particularly important when you have multiple properties, an investment property, or properties in multiple states.

  4. Strategic Philanthropy
    Charitable giving can be a powerful way to lower your tax bill while also supporting causes you care about. However, it's important to be strategic about your donations to ensure that you're maximizing your deductions in the process. For example, donating stock that has appreciated in value can be more tax-efficient than donating cash, and at certain levels you may even need to consider a donor advised funds.
  5. Estate Tax
    In recent years as the estate tax exemption floor has raised, complex estate tax planning is less relevant, unless you are dealing with an ultra high net worth. If your estate is valued at more than $12.92M (2023,  Investopedia), your Wealth Manager will be factoring in an estate tax strategy and it's impact on your ability to pass wealth to the next generation.

Professional Tax Advice

It's important to remember that tax laws are complex and ever-changing, so it's wise to consult with a tax professional to ensure that you're taking advantage of all types of income tax deductions, but staying compliant and transparent with the IRS. A pro tip is to find a wealth manager who has experience with tax strategy and how it connects to other aspects of your financial plan like investment income, life insurance and estate planning. At the very least, connect your tax advisor to your financial planner to avoid missed opportunities that can have a significant impact on your financial future.

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For over twenty years, Susan has passionately provided wealth management services to individuals, families, fiduciaries, private foundations and their related entities with a focus on sophisticated income, gift and estate tax consulting and compliance, proactive executive compensation planning and succession planning. Susan understands the many facets involved in creating a successful multi-generational family legacy and uses a forward-looking approach to help clients grow and preserve assets, reduce taxes and realize both their financial and non-financial goals. Susan’s experience includes practicing law in the tax and estate planning. More »