What the Professionals Say About Tax Planning

 

We talked with two high-ranking financial professionals who have seen it all: Michele Graham, Vice President and co-leader of the Tax Department at Harding, Shymanski & Company and Jeanne Krigbaum, Chief Wealth Planning Officer at 1834, a division of Old National Bank.

 

In their years of advising high-net-worth individuals, they’ve encountered the same mistakes time and again when working with new clients. Here are the mistakes—and how you can avoid them.

Mistake 1: Too Short a Timeline

“It’s very easy for someone to focus on ‘How can I have the lowest possible taxes this year?’” said Michele Graham of Harding, Shymanski & Company.

 

But that mentality can be shortsighted. An outlook of 3 to 5 years may make more sense.

 

For example, after a high-net-worth individual has retired, they may have several years of low or no income before they’re required to take taxable distributions from their IRA or 401k.

 

Rather than paying the lowest possible taxes in those years, a person may benefit from converting part of their tax-deferred accounts into Roth accounts, said Graham. This will trigger a one-time taxable event, but the person will be doing so at a time when they’re in a lower tax bracket.

 

This has potential for long-term benefits: the filer lowers the amount of their future taxable Required Minimum Distributions (RMDs) while also creating an account (the new Roth account) that they can draw on tax-free in future years, after paying the one-time tax.

 

On the flip side, Jeanne Krigbaum of 1834, shared an example she sees, where clients aren’t planning for future large tax events.

 

“With executives close to retirement, they often know that in a year or two, they will temporarily have very high income. For example, if they’ll receive a lump sum of non-qualified stock options as part of their retirement package,” she said.

 

Krigbaum suggests that philanthropic clients in this situation delay their charitable contributions to coincide with high-income years, so that their gift reduces their taxable income in that year. By waiting to make the donation, a client could benefit substantially.

 

Additionally, with a Donor Advised Fund (DAF), clients can deduct a large contribution in one tax year, while slowly distributing it in years to come.

 

“Rather than write a $100,000 check to your alma mater every year as part of an endowment obligation, it may make strategic sense to put $1M in a DAF in a high-income year, and then distribute the funds to your alma matter over time,” she explained.

Mistake 2: Not Having Discussions Soon Enough

It’s not enough to identify potential opportunities—you need to identify them with enough time to execute on the idea.

 

“This is the number one mistake I see,” said Graham. “Tell your advisor as soon as you realize something is different, rather than after year end, when it is tax time.”

 

Graham outlined three examples she commonly encounters:

 

Not planning for a lower income year. For people with high net worth, this represents a real opportunity. As mentioned above, you could consider a Roth conversion. You could also potentially realize capital gains from an investment account, or consider vesting stock options while at a lower tax bracket. But, if your tax advisor doesn’t know you earned less in a year until after the year is over, your opportunity may have passed.

 

Tax Loss Harvesting. This refers to selling stock at a loss in order to offset capital gains in that tax year—and potentially in future years. It is often done strategically in collaboration with your investment advisor, so that you maintain exposure to the same sector or asset class without triggering wash sale rules. Many people wait until year-end to review their equities and see which to sell. However, the market can dip any month of the year. To maximize your loss, you want to keep an eye on opportunities year-round. 

 

Charitable Giving. If you work with your advisors, you can choose the right charitable giving vehicle to maximize the effectiveness of your gift and benefit your taxes. As soon as you know you want to donate a substantial amount of money, loop in your tax advisor as well as your wealth advisor and lawyer. Don’t just write a check.

Mistake 3: Not Developing an Overall Financial Plan

Forgoing income without regard to your desired lifestyle could end up lowering your taxes—and make you unhappy. The best financial plans are connected to your long-term life goals.

 

“I tell clients, ‘You may have goals that benefit from having income, let’s not overlook that,’” said Krigbaum, “For example, if you want to buy a house in a given year, or need to purchase health insurance for yourself before you qualify for Medicare. An income stream can be extremely useful and can prevent you from liquidating assets at inopportune times.”

 

When you have a financial plan that reflects your values and goals, you can be confident in your overall financial decision—and not let yourself be guided just by tax strategy.

Mistake 4: Not Getting All Your Advisors Involved

“I sometimes see different types of advisors working at cross purposes for the same person,” said Graham. “When no one knows the full story, it’s impossible to work together as a team. That can lead to mistakes.”

 

Both Graham and Krigbaum recommend meeting regularly with your tax advisor, estate lawyer, investment professional and wealth advisor all at once. That way, everyone will understand your financial goals—and work together on pursuing them. 

 

“When you get people with different expertise in the room, you can develop ideas that really benefit the client. These are ideas that each person wouldn’t have necessarily come up with in isolation,” said Graham.

 

While the cost of these meetings may feel expensive, both Graham and Krigbaum emphasized that they’re almost always worth it, since you’ll be developing a coordinated, efficient strategy.

 

“You may be surprised at how quickly you see a pay off,” said Krigbaum. 

Benefit from the Experience of Professionals

The guidance of experienced professionals can be invaluable. To avoid the common tax mistakes of high-net-worth individuals, Graham and Krigbaum both suggest thinking big picture and building a cohesive team of experts around you. And then be open about your financial goals.

 

When you build a holistic financial plan in conjunction with your advisors, you put yourself in the best possible position to succeed in lowering your overall lifetime tax burden—and in pursuing the life and legacy you envision.