Tax Planning
“The hardest thing in the world to understand is the income tax.”
Unlocking the full potential of your wealth requires more than just smart investing—it demands a proactive approach to tax planning. At Financial Mountain Inc., we integrate tax strategies into every aspect of your financial plan, helping you preserve, grow, and transfer your wealth efficiently.
Why Tax Planning Matters
Tax planning is a cornerstone of effective wealth management. Every financial decision—from investments to retirement withdrawals—carries tax implications. By anticipating and managing these, you can:
Reduce your overall tax bill: Strategic allocation to tax-efficient accounts and investments minimizes your tax liability, allowing you to keep more of your returns.
Increase investment earnings: Tax-efficient portfolio management, such as tax-loss harvesting and asset location, helps maximize after-tax returns.
Achieve your financial goals: Lower tax burdens mean more resources to fund your ambitions, whether that’s retirement, philanthropy, or legacy planning.
Benefits of Tax Planning
Reduced Tax Liability
Proactive strategies help minimize taxes on income, investments, and estates.
Enhanced Investment Returns
Tax-efficient investing and loss harvesting boost after-tax performance.
Optimized Retirement Income
Smart withdrawal strategies from tax-advantaged accounts lower taxes in retirement.
Efficient Wealth Transfer
Estate and legacy planning tools, like trusts and gifting, reduce taxes for heirs.
Adaptation to Changing Laws
Ongoing guidance ensures your plan stays current with evolving tax regulations.
Maximizes Use of Tax-Advantaged Accounts
Ensures contributions to 401(k)s, IRAs, HSAs, and other accounts designed to offer tax breaks, both now and in retirement.
Tax Planning FAQs
How can I lower my taxable income?
Lowering your taxable income involves using deductions, credits, and tax-advantaged accounts to reduce the amount the IRS considers taxable. Common strategies include contributing to traditional retirement accounts (like a 401(k) or IRA), maximizing HSA and FSA contributions, claiming business or education-related deductions, and using charitable donations. A personalized financial plan helps identify the right strategies based on your income, employment type, and long-term goals.
What tax advantages come with retirement accounts (IRA, Roth IRA, 401(k), etc.)?
Traditional IRAs and 401(k)s offer tax-deferred growth—your contributions may reduce your taxable income now, and taxes are paid later upon withdrawal. Roth IRAs, on the other hand, are funded with after-tax dollars, but allow for tax-free withdrawals in retirement. These accounts provide powerful tax planning tools when used strategically and in alignment with your retirement timeline and expected future income.
Should I do a Roth conversion—and if so, when?
A Roth conversion allows you to move funds from a traditional IRA into a Roth IRA, paying taxes now to enjoy tax-free withdrawals later. The timing is crucial. Converting in a low-income year, or before reaching the age for required minimum distributions (RMDs), can minimize your tax impact. A financial planner can help you assess if a Roth conversion fits into your long-term strategy, as it would trigger a taxable event.
What deductions and credits am I eligible for?
Deductions reduce your taxable income, while credits directly reduce your tax bill. Eligibility varies based on your income and circumstances, but common deductions include mortgage interest, student loan interest, medical expenses, and charitable donations. Credits may include the Child Tax Credit, Earned Income Credit, or education credits like the American Opportunity Credit. A financial advisor or tax professional can help you maximize both.
How are my investments taxed?
Investments are typically taxed based on how long you’ve held them and what type of income they generate. Short-term capital gains (for assets held less than a year) are taxed as ordinary income, while long-term capital gains receive lower rates. Dividends may be qualified or non-qualified, affecting their tax rate. Interest income is generally taxed as regular income. Tax-efficient investing aims to minimize these liabilities while still growing your portfolio.
All of this is of course assuming we’re under the 2024 tax code, but codes can change from year to year. Contact us to get specific answers for your unique situation.
Can I reduce taxes through charitable giving?
Yes, charitable giving can provide both personal fulfillment and tax benefits. Donating cash, appreciated assets, or using vehicles like Donor-Advised Funds (DAFs) can reduce taxable income. Those over age 70½ may also consider Qualified Charitable Distributions (QCDs) from IRAs to fulfill RMDs tax-free. Strategic giving ensures your generosity aligns with your financial and tax goals.
How will taxes affect my Social Security and retirement income?
Depending on your total income, up to 85% of your Social Security benefits may be taxable. Withdrawals from traditional retirement accounts (IRAs, 401(k)s) are taxed as income, which can increase your overall tax burden in retirement. Proper planning—such as managing withdrawal timing, leveraging Roth accounts, and monitoring income thresholds—can help you minimize taxes and keep more of your retirement income.
How should I handle taxes on a windfall, inheritance, or property sale?
Large one-time events like selling a property, receiving an inheritance, or winning a settlement can create significant tax consequences. Strategies such as installment sales, charitable trusts, or gifting can reduce or defer the tax impact. It’s essential to meet with a planner before taking action to ensure you’re managing the windfall in a tax-efficient and financially sound manner.
What are the best tax strategies for my small business or side income?
Business owners and freelancers have unique opportunities to reduce taxes through deductible expenses, qualified retirement plans (like SEP IRAs or Solo 401(k)s), and strategic entity structures (LLC, S-corp, etc.). Tracking business-related costs, home office deductions, and mileage can also help. Proper planning ensures you’re not missing deductions and that you’re setting aside enough for quarterly taxes.
How do I plan for estate taxes and wealth transfer?
Estate planning can help reduce or eliminate estate taxes, ensuring your wealth passes to your heirs efficiently. Tactics may include gifting during your lifetime, setting up trusts, or using life insurance to cover potential tax liabilities. Staying below federal and state exemption thresholds is key. A well-designed estate plan preserves more of your legacy for your family and charitable causes.
