“In this world, nothing can be said to be certain, except death and taxes.” We have all probably heard this quote by Benjamin Franklin multiple times in our lives. It is certain we will all eventually die and continue to pay taxes, but by engaging in effective tax planning, we can manage and potentially avoid paying more tax than necessary.
Most people engage their CPA or tax preparer to help them file their annual tax returns. This scenario typically results in a reactive approach to managing your taxes. A proactive approach begins early to take advantage of all the available savings and retirement tax benefits.
Tax planning is a key pillar of your overall financial plan. Your CPA or tax preparer should collaborate with a CERTIFIED FINANCIAL PLANNER™ professional to ensure wise tax decisions benefit your portfolio and overall financial plan.
A CERTIFIED FINANCIAL PLANNER™ professional’s expertise encompasses all aspects of financial planning. This is what differentiates a CERTIFIED FINANCIAL PLANNER™ professional from other financial advisors, brokers, or investment managers who typically do not engage in this type of planning regularly.
I am a CPA and CERTIFIED FINANCIAL PLANNER™ professional, holding both designations. Every day I see the impact proactive tax planning has on my client’s financial plans. Below is an example.
One of my clients owns and operates multiple real estate properties that produce sizeable amounts of annual income. To help defer some of the current tax liability on this income, I recommended my client set up a defined benefit pension plan. This allowed them to contribute tens of thousands of dollars to the plan over multiple years. The client was in the maximum tax bracket, which resulted in large tax deductions that totaled tens of thousands of dollars over the same time period. As the client’s business continued to thrive, they would build a new property to expand the business. By utilizing favorable depreciation rules at the time the new building went into service, we were able to create a large net loss on the client’s tax return. Being proactive, I then recommended to the client they roll their defined benefit plan into an IRA and then convert to a Roth IRA. Although Roth IRA conversions are fully taxable, we were able to use the large net operating loss to completely offset the income from the Roth conversion.
This was a complete home run for the client! They received large tax deductions for the contributions to the defined benefit plan, paid zero tax to convert to a Roth IRA, and will be able to withdraw funds tax-free from their Roth IRA in retirement.
This is one example of the results proactive tax planning and a strong collaboration between your CPA/tax preparer and a CERTIFIED FINANCIAL PLANNER™ professional can yield. While it’s certain we will continue to have to pay taxes, having the right team in place can help to manage the effects of taxes on your financial plan.
Published in the Victoria Advocate
Kyle W. Noack CPA/CFP® is Chief Financial Officer for Keller & Associates CPAs, PLLC and KMH Wealth Management, LLC