It’s that time of year again. It is a time when we look back at the previous year, as well as into the future. It’s tax season. Typically, taxes aren’t top of mind year-round; however, many people become mindful of their financial health between January and April. You work hard for your money, and I’m sure you would appreciate keeping it. If you want to protect your wealth, an important element of doing so is by mapping out your best 2021 tax strategy.
Simply put, a tax strategy is a plan you put into place that is focused on reducing your taxes. It involves a comprehensive look at your income, expenses, and investments, as well as your future financial goals. It’s important to note, this is different from a tax policy. Tax policy is the governing framework that formally sets out an organization’s standards and procedures regarding taxes. On the other hand, a tax strategy is a plan based on facts that aim to support your financial goals. It will detail how you can reduce your taxes and maximize deductions based on current tax laws. A tax strategy takes a long-term approach, and the best way to map out yours is with professional guidance. The first step in mapping your 2021 tax strategy is finding the right professionals to help you achieve these goals.
William Wolfe from Fragasso Financial Advisors, an independent, employee-owned, and primarily fee-based investment management and financial planning firm in Pittsburgh, recommends creating your own financial Board of Directors. This is a network of professionals that will assist you in reaching your financial goals. Consider yourself the Chairperson, and on this board, you will have your trusted lawyer, accountant, banker, and of course, financial advisor. During tax season, your accountant and financial advisor will be working closely together to ensure various steps are taken in advance of April 15th. This includes summarizing your account distributions and contributions, gathering an estimation of investment gains or losses, and putting together a report on your various income sources from the previous year. This information lays the foundation for your tax strategy.
These professionals have current knowledge of federal and state tax codes. These codes are quite complicated and continuously changing, requiring your tax strategy to pivot accordingly. When you have a trusting and productive relationship with these members of your personal board of directors (and you should!), you can focus on your busy personal and professional life and trust they will update you on changing tax codes accordingly. A financial advisor will update you on recent changes that will also help your accountant be able to better determine the tax information on your return as well as have an understanding of the corresponding tax documents. Additionally, if you have 1099 tax forms or K-1 distributions and there is a delay in reporting them, your accountant will have enough time to file for an extension.
This past year, the market has been turbulent, to say the least, thanks to the COVID-19 pandemic. If your financial advisor harvested investment capital losses, your accountant would now be able to advise on an amount of investment gains to realize at a net neutral tax liability. Let’s say despite the COVID-19 pandemic, you performed very well last year and had an unusually high income with substantial investment gains. You don’t want to lose this all to taxes! Instead, your financial advisor and accountant can work with you to take advantage of tax-deductible retirement contributions, ways to fund your children’s education, or charitable donations.
With your financial advisor, you need to establish your short and long-term financial goals as your tax strategy is the basis for your overall wealth strategy. Following this, you must complete an in-depth evaluation of your personal and business tax structure. It’s essential to understand your tax bracket. If you earn a higher income, you are likely susceptible to paying more in taxes. Fortunately, with help from professionals, you probably won’t be taxed for your entire income. Deductions play an important role in reducing the amount you need to pay, and there are hundreds of possible deductions and credits out there. If you aren’t clear on your deductions, don’t worry – that’s what the experts are for. They are familiar with them and how you can use them to maximize your tax benefits. In addition to tax deductions, you could take advantage of tax credits. These give you a dollar-for-dollar reduction, so if you have a $10,000 tax credit, that will take $10,000 off your tax bill. There are several other opportunities like retirement contributions and health savings that can also positively affect your taxes.
After you have established your 2021 tax strategy and filed your 2020 taxes, you can’t exactly wash your hands of it. Keeping detailed records, documents, and tax returns is critical in the event you are audited. The IRS may audit up to three years prior, so you must keep three years’ worth of documents. In some cases, it’s best to keep some records for longer. Again, this is a vital piece of the strategy that your personal board for directors can provide further guidance on.
Tax planning and strategy should be an on-going, dynamic process. Your tax situation will improve with a more strategic approach that experienced professionals act on. In fact, with the right strategy and guidance, your taxes can go from being your biggest expense to one of your best assets considering every dollar saved on taxes can be reinvested. In 2018, the IRS issued $111.8 million in refunds, and these numbers increase each year.
Just as you would for a major corporation, you need to select the best for your personal board of directions. As the tax deadline is quickly approaching, ensure you pick a financial advisor that won’t take the job lightly. They must coordinate key financial items to map out your tax strategy and maximize your wealth. Map out your best 2021 tax strategy with a team of experts and make the most of your money.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.
Fragasso Financial Advisors recommends coordinating all tax advice with your professional CPA or accountant.