How a Financial Advisor May Help Lower Your Tax Bill

March 1, 2024

Careful tax planning throughout the year may put more money in your pocket      

Tax planning is a vital part of any wealth management strategy, but reducing your tax burden isn’t always a straightforward process, especially for individuals with more complicated returns. Careful planning may help minimize your tax liability leaving you with more money to further your financial goals.

Tax planning should not be just something you think about when filing, it requires year-round attention if done properly. Surely, your accountant should play a large role in this, but consider working with a financial advisor who may recommend tax-efficient investment strategies as well.

What is tax planning?

Tax planning may involve examining your finances holistically and incorporating strategies to reduce your overall tax bill through careful planning around income, purchases, investments, and strategies like tax-loss harvesting.

Strategic tax planning may also help maximize your estate and provide more flexibility for your heirs. For example, as part of your tax plan you might hand off portions of your wealth to family members as tax-free gifts or establish an irrevocable trust to reduce the federal tax burden for those who inherit your estate.   

How may a financial advisor help?

As part of an overall plan to manage your wealth, many financial advisors will offer tax planning services, which may include:

  • Charitable giving strategies. The amount and timing of charitable giving may have an impact on your tax bill. A financial advisor may help you determine when and how much to give so you may deduct your charitable contributions from your adjusted gross income. An advisor may help you time gifts to charity so deductions may offset other big taxable events, like a financial windfall, a salary raise, or a large bonus at work.
  • Tax-loss harvesting. An advisor may help you determine when to sell investments that have lost value to realize capital losses that may be used to offset taxable gains. Your advisor may help you use proceeds from the sale to reinvest in similar securities with upside potential.
  • Choosing tax-efficient investment vehicles. A strategic tax plan should consider the impact of contributions to tax-deferred savings accounts like 401(k)s, 529 education plans, and health savings accounts (HSAs). Some plans—like traditional 401(k)s, traditional IRAs, and HSAs—provide an immediate benefit by allowing you to reduce your taxable income. Contributions to 529 plans aren’t tax deductible, but investments inside the account grow tax-free. Withdrawals made to cover qualified education-related expenses are tax-free as well. A financial advisor may help you plan contributions to tax-deferred accounts to minimize what you owe in taxes.
  • Multi-Year tax planning. The most effective tax plans go beyond annual strategies and look ahead to your long-term financial goals. An advisor may help you put together a multi-year plan to help reduce your tax burden in the long run. For example, they could help you bank capital losses to offset a future taxable even, such as the sale of an investment property.

Tax planning may involve a lot of moving parts from annual adjustments to IRA contribution to charitable deductions to staying abreast of local tax laws. Working with a financial advisor on year-round tax planning may help ensure you’re maximizing tax deductions, taking advantage of tax credits, and using tax-efficient investment vehicles effectively. An advisor may help ensure you don’t miss any opportunities to reduce your bill and will keep up with regulatory changes, making any necessary adjustments to your plan.

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