One of them is Taxes
It’s mid-March, and we’re in the midst of an annual ritual that connects us all: tax season.
As tax forms begin arriving, many of us are getting ready to prepare our tax returns, hoping either for a refund or planning to file an extension. Taxes are an unavoidable aspect of many decisions we make throughout the year and throughout our lives. Planning for taxes can impact our decisions, allowing us to make better-informed choices, leading to better outcomes.
As financial advisors, much of the work we do with our clients has a tax component associated with it, and although we do not provide tax advice, we are always mindful of how taxes affect outcomes.
A very simple example involves sales tax. It is easy to ignore the 9 cents of sales tax you pay on a $1.00 pack of gum. Other times, sales tax can greatly affect a decision. In California, a $30,000 car actually costs closer to $33,000 when factoring in sales tax, which could change how affordable that car really is for you.
More nuanced examples involve distributions from retirement plans. When these distributions come from a pre-tax account, like an IRA or a 401k, they typically create taxable income at your normal income tax rate. There are various reasons you may need or want to take this money out. If you need it to pay expenses, tax planning can help you know the true cost of those expenses – exactly like the $30,000 car – which can help inform decisions before you commit to them. If you’re in an unusually low-income year, post-retirement but pre-Social Security, it may make sense to take a distribution and pay less tax than you normally would. If you’re over age 72, you are required to distribute a certain amount each year, and although there is (usually) no flexibility to take less than that amount, you can always take more.
There are, of course, even more complex situations. 1031 exchanges of real estate, employee stock options, philanthropic legacy planning – all of these examples derive tremendous value from careful tax planning. Most people can’t or don’t want to do this kind of planning on their own, and they seek out professional help. For specific needs, it is worthwhile to work with a tax professional who specializes in that area.
While we at North Berkeley are not tax preparers, taxes are an important part of the financial planning and investment management work we do for our clients. We also help connect clients with high-quality tax preparers to expand their professional team. Taxes may be one of life’s certainties and we have seen countless times that having the right professional and effective collaboration can make all the difference.
 | About Sam Wood-Bednarz, CFP®Sam Wood-Bednarz is a Partner, Senior Advisor, and Director of Financial Planning. He provides clients with a sense of confidence and security in their financial lives. |
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