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Make Your Tax Documents Do Double Duty. Your Future Self Will Thank You

Make Your Tax Documents Do Double Duty. Your Future Self Will Thank You

May 25, 2021

When I ask clients for their tax returns, I’m sometimes met with a “why?” The truth is that many of the documents that you collect to file your taxes can help with your financial planning. And that’s good news! After all, we all hate organizing that stuff – now we can get the most out of our effort.

Your 1099

When I take a look at a client’s 1099, I’m checking to see if their accounts are structured in the most tax-efficient way possible. I recently had a client with a small account that is being actively traded – this means lots of buys and sells.  She had set this account up as a standard brokerage account, so she was paying taxes on all of the gains at the least favorable rate- short-term gains.  I recommended instead that we move $14,000 into a Roth IRA - $7,000 for 2020 and $7,000 for 2021 and that future trading be done in the Roth.  This change helps mitigate that tax issue.

Itemized Deductions

The 1099 continues to be a wealth of information! I had a discussion with a client who was selling off all of her Employee Stock Purchase Plan stock when it hit the two-year mark of holding.  She was also giving about $3,000 a year to a local food bank.  We looked up the local food bank and found out that they can accept appreciated stock. 

Now my client is gifting them $3,000 worth of appreciated stock instead of cash.  The food bank is happy because they get the full $3,000 now, instead of waiting for it on a monthly basis.  She is happy because she doesn’t have to sell the stock and realize the gains – triggering a tax bill.  It’s a win-win. Now, after she has sent the stock, she is investing $3,000 back into her portfolio with a higher cost basis.  This strategy will not only reduce her taxes today but potentially in the future as well.

Charitable Planning

I have many clients who no longer have mortgages, so they don’t have a lot to write off on their itemized deductions.  For some, they are choosing to group their charitable contributions into every other year donations to their donor-advised funds.  This allows them to take the standard deduction in years when they don’t donate and itemize in years that they do.  If they spread the deductions out over multiple years, they wouldn’t be high enough to allow them to itemize, so they would miss out on the tax advantages. 

IRA Contributions

Almost anyone can make an IRA contribution – it’s just is a question of what kind. 

  • For some, their income levels will allow deductible IRA contributions.
  • Others qualify for Roth IRA contributions.
  • There are also traditional IRA contributions that are not deductible. 

This last group can help to diversify your taxes in the future and may also be eligible for a strategy commonly known as the Backdoor Roth IRA.  There are lots of rules around this so before you go there, it’s important to discuss this option with a financial professional.  It is important to remember that withdrawals from traditional IRAs are taxable as income in the year that they are taken, and a 10% penalty may apply if withdrawn prior to age 59 ½. 

Tax Losses

Carrying forward tax losses allow us to plan for potential gains in a client’s portfolio.  This is especially helpful when we are trying to rebalance accounts without creating too much tax liability. 

Required Minimum Distributions

Finally, we look for charitable contributions on the itemized deductions made by people who are currently receiving Required Minimum Distributions (RMDs).  If made directly from the IRA instead of having funds from the IRA distributed to you and then writing a check to the charity, they come off of a different part of the return than itemized deductions.  This is especially helpful for our clients who are no longer itemizing.  It allows them to make the contribution and still get tax benefits.

Ready to Get Started?

Something that’s helpful to remember is that while filing your taxes is taking a look backward, using that information for financial planning is helping your future self. Financial planners will want to see your tax returns, mortgage documents, paystubs, and account statements. 

You’re already preparing these your taxes – why not make a quick extra copy for a financial planner?

It’s also important to remember that when it comes to your taxes and financial future, tax laws are constantly changing - what will actually be passed by Congress is anyone’s guess.  So, when it comes to good tax planning, you should start as soon as possible and make sure that your accounts are structured in the most tax-efficient way.  Proper planning today, including a charitable giving strategy, will minimize your future taxes, regardless of what the rates may be. 

Lincoln Financial Securities and its representatives do not offer tax or legal advice.  Individuals should consult their tax or legal professionals regarding their specific circumstances.  LFS-3601818-052121