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5 Tax-Planning Tips

The 2018 tax changes may have lowered your total tax liability, but many Americans were surprised by their refund, or worse…their tax payment! Proper tax planning should be a coordinated effort between your tax preparer and investment advisor.

When tax and estate laws change, your investment advisor should be proactively providing you with tax strategies to consider and work closely with your tax advisor to minimize your tax liability and avoid the surprise many American’s experience. Here are five tax tips to consider for 2019 to help ease the pain and make sure you are doing all your can to keep your hard-earned money:

1. Take full advantage of tax deferred savings: Review your current savings goals and cash flow to ensure you are maximizing your tax deferred savings. Many families maximize their 401(k) plans but miss out on other opportunities to lower current and future tax liabilities. Examples could be funding a SEP IRA if you have self-employment income or a SIMPLE IRA for you and your employees. Another thing to consider is a Roth IRA. While Roth IRA contributions do not reduce your current tax liability, they offer tax exempt growth, which should lower your future tax burden.

2. Confirm your income tax withholding: Review your income tax withholding (if employed) with your 2018 tax liability to ensure you don’t face potential underpayment penalties. This is critical if your income fluctuates from year to year, or if you have income from sources other than wages (i.e., rental, self-employment, or

investment income). If you are self-employed, making timely estimated income tax payments are critical. Receiving a large refund can also be problematic as it means that your family is experiencing less cashflow throughout the year. This could cause you to miss out on opportunities, such as tax deferred savings, college savings goals, debt reduction, and general lifestyle needs/wants. Striking the right balance is important to ensure your money is working for you, and that you won’t have any surprises during tax season.

3. Invest with tax efficiency in mind: Low cost index funds are a great way to reduce your long-term tax bill. They often generate less taxable income (not to be confused with growth) compared to their unnecessarily expensive counter parts, active managers. Active managers are notorious for generating higher taxable income, with similar or lower overall returns than passive managers. Also, consider municipal bonds versus taxable bonds. Municipal bonds generate tax exempt interest (in most cases). Depending on your tax rate, you may be better off earning slightly lower tax-free interest income, compared to slightly higher taxable interest.

4. Contribute to a Donor Advised Fund (DAF): With the increased standard deduction, many families do not receive the tax benefit for their charitable contributions. By “front loading” your contributions using a DAF, you might be able to increase your deductions to a level where you can itemize the deductions in 2019. This topic requires tax analysis that expands beyond the scope of this article. To learn more about DAFs please reach out to us and we will be happy to walk you through the details, just click here for our contact information.

5. Work with a skilled CPA: Your tax professional should know your situation and line of work. A great CPA will earn their fees with active tax planning and compliance with applicable laws. They will identify missed opportunities that may be unique to your situation. For example, did you know teachers receive a tax benefit for supplies purchased for the classroom that were not refundable by the school? Those little tips add up to more money in your pocket. If it isn’t too late, find a CPA for 2018 and get a solid plan for 2019. Lastly, your CPA should serve as part of your wealth management team. They should coordinate with your investment advisor to ensure that your situation is monitored. Team work is key in making your life easy and ensuring you get the best results. Remember, after tax income and returns is what funds your lifestyle. Tax inefficiencies in your plan reduce your spending power. This erosion of returns can have a meaningful impact over time.

I am hopeful that these tax tips help you in 2019. At TruNorth Capital we believe in putting every dollar in YOUR pocket that we can. That includes a low cost, tax efficient investment and wealth management strategy. We pride ourselves on our personal mission to be the premier high-quality, low-cost independent advisor available. We are unwavering in this goal with fees starting at 0.33% and no minimums. With the support of our clients, network and community we are well on our way to achieving our goal. Call us to learn more!

Disclosure: This article does not constitute tax advice. Consult with a tax advisor to determine if the above strategies are applicable and prudent for your situation.


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