Income tax planning and estate planning elements have become a more critical part of overall personal financial planning with the enactment of the American Taxpayer Relief Act of 2012 and the Net Investment Income Tax. While reviewing those 1040s, you are able to envision potential tax impacts of financial decisions and begin considering tax planning strategies for your clients, which broadens your relationship. This is a great first step in helping them meet their overall financial planning needs, including making estate, retirement, investment and risk management planning decisions to move them toward their long term goals.
- Investment Strategies. Since the passage of the American Taxpayer Relief Act and the enactment of the net investment income tax last year, clients are faced with a significantly higher income tax rate on investment income. It is causing many to step back, look at their investment strategies and analyze the tax implications.
- Asset Placement. Asset placement issues are a critical piece of the planning picture. I think it’s particularly important to do two things: 1) decide whether fixed income that generates a lot of taxable income should be in retirement accounts, Roth IRAs or regular accounts; and 2) determine whether higher growth equities that are taxed at a lower rate belong outside of the retirement account.
- Harvesting Gains. Harvesting gains can be part of a client’s overall strategy – even in this environment with higher tax rates on capital gains. Trying to plan that around a client’s income year by year, over a multi-year period, is the best way to identify where to incorporate capital gains. I believe that harvesting gains can make sense in the right scenarios – especially for clients with low incomes due to business losses in a particular year.
- Planning for retirement. One of the main issues I see people focusing on is retirement planning. To be effective, look at an asset’s efficiency and do projections on an asset basis. Determine whether it will last through a client’s lifetime and then look at where that income stream is going to come from (such as an IRA, a pension or from a regular account) when a client retires.
CPAs are positioned to have ongoing and regular conversations with clients. Taking advantage of that face time will allow us to enhance how we serve our clients and proactively address their personal financial planning needs.