In the past two decades, financial planning has risen to prominence as the keystone to providing financial services for individuals. Indeed, wealth management firms, securities brokers, banks, trust companies, debt management organizations, insurance corporations, and many other financial institutions now center their services around the comprehensive financial plans they offer their clients. These plans are broad in scope and generally try to incorporate all aspects of an individual’s financial life from retirement to education funding to disability insurance and everything in between. One consistent thread that runs throughout all financial planning and knits all these topics together is tax planning.
Tax planning is built on the fundamental premise that individuals will generally work to lower their tax burdens whenever possible. Simply put, tax planning focuses on using legal means to take full advantage of tax benefits offered under the tax laws. While these benefits can substantially lower an individual’s tax burden, as with most tax laws, the rules are complex and require careful understanding and planning to implement effectively. Moreover, the extensive array of financial planning topics in which tax planning is needed adds to the complexity. Consider the role of tax planning in:
Retirement Planning
Financial planners work with clients to ensure they have sufficient assets and cashflow to fund their retirement. Essential to all retirement plans is understanding the special arrangement of tax deductions, deferrals, distribution timing, and employment taxes that lay the foundation for 401(k)s, IRAs, Roth IRAs, Social Security, deferred compensation and pension retirement systems.
Estate Planning
Once the domain of antiquated wills and byzantine rules, modern estate planning is now a dynamic area of financial planning that includes specialized trust arrangements, family partnerships, incapacity planning, and numerous other related considerations. All sophisticated estate plans work to guard against the estate tax, step-up the basis of inherited assets, and maximize value an individual may leave to family, friends, and charitable causes.
Business Planning
While most business owners know how to run their business, fewer know how to structure a business entity, efficiently acquire a competitor, transfer the business to the next generation, or sell it to a third party. Tax issues are present in all aspects of business formation, business operations, business transfers, and business succession planning.
Investment Planning*
Good investors know how to buy, be patient, and diversify their assets. Great investors understand tax strategies and know how to invest in tax-free instruments, defer taxes on real estate investments, harvest losses to offset taxable gains, and transfer growth assets out of their estate.
Charitable Gifting
A survey found that 64% of Americans gave to charities in 2022. This philanthropy undoubtedly benefits society. But a well-structured charitable gift can also reduce an individual’s income tax, provide a tax-preferred flow of income, lower the estate tax, and offer the giver control over the gifted assets for years to come.
Indeed, the many realms of tax planning can offer significant tax savings and other benefits, but they can also be dizzying labyrinths of rules, choices, limitations, pitfalls, strategies, and structures. A sophisticated tax planning guide can help you understand how to take advantage of tax savings that may be available to you.
Of course, this guidebook is not the final authority on tax planning. Taxes are complex, and the best way to plan for them, take advantage of available tax benefits, and avoid potential tax problems is with professional advice.
Once you review this guide, we would welcome the opportunity to help you map out a tax plan that takes full advantage of all strategies available to you. Most tax reduction strategies must be implemented by Dec. 31 —and some even sooner. If you would like to discuss how we can help you develop a tax plan for 2024 and beyond, please reach out to a financial professional at LBMC to get started.
* Investment advisory services are offered through LBMC Investment Advisors, LLC, which is a registered investment adviser with the U.S. Securities & Exchange Commission.
