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Tax Planning

As savers and investors one of our biggest expenses is taxes. Financial Advisors often overlook the importance of integrating tax planning in helping clients reach their objectives. We have built tax efficiency into our portfolio management and we also incorporate tax planning into all of our clients financial plans. We often coordinate with our clients CPA or tax preparer to make sure the best strategies are being put to work.

Tax Planning Services:

  • Roth Conversion
  • CPA Prepared 2nd Opinion & Reviewed Tax Returns
  • Tax Efficient Investment Strategies
  • Tax Focused Wealth Transfer Planning

“5 Most Frequently Asked Questions on Tax Planning”

Question #1: How do RSUs and stock options differ in tax treatment

Answer: The major difference between RSUs and stock options is the way they are taxed. RSUs are taxed as soon as they become vested and liquid. In most cases your employer will withhold some of your RSUs as payment for taxes owed at the time of vesting. In some cases you may be given the option to pay the taxes due with cash on hand so you retain all vested RSUs. In either case your RSUs are taxed at ordinary income rates, which can be as high as 48% (Federal + State) depending on the value of your RSUs and the state in which you live. Holding on to your RSUs is equivalent to making the decision to buy more of your company stock at the current price. In contrast, options are not taxed until they are exercised. If you exercise your options before the value of the options has increased and file an 83(b) election then you will not owe any taxes until they are sold. If you hold on to them, in this case for at least a year post exercise, then you will be taxed at capital gains rates, which are much lower than ordinary income rates (maximum of approximately 36% vs. 48%). If you exercise your options after they increase in value, but before you are liquid, then you are likely to owe an Alternative Minimum Tax. We highly recommend you consult with a tax advisor before making this decision. Most people do not exercise their options until their employer has gone public. At that point it is possible to exercise and sell at least enough shares to cover the ordinary income tax owed on the appreciation of the options. The good news is, unlike RSUs, you can defer the exercise of your options to a point in time when your tax rate is relatively low. For example you might wait until you buy a house and are able to deduct most of your mortgage payment and real estate taxes. Or you might wait until you benefit from tax losses harvested by an investment management service like Labrum Wealth Management. RSUs and stock options were designed for very different purposes. That’s why the tax treatment and amount you should expect to receive differ so much. We strongly believe that with a better understanding of how their use has evolved you will be able to make better decisions on what constitutes a fair offer and when to sell. We are also very aware of how complex and specific your own decision-making can be so please feel free to follow up with questions in our comment section —they are likely to prove helpful to others as well.

Question #2: When Do You Use a Traditional vs. Roth IRA?

Answer: The formulas for the after tax value of a Traditional and Roth IRA at time of withdrawal are:

Traditional = Amount deposited * (1+portfolio return) ^number of years invested * (1 – ordinary income tax rate at time of withdrawal)

Roth = Amount deposited * (1 – ordinary income tax rate at time of deposit) * (1+portfolio return) ^number of years invested

Individual retirement accounts can be a wonderful way to save money for retirement. Unfortunately, the choice between the two primary types of IRAs is not as simple as you might think due to differences in tax treatment, income restrictions and withdrawal requirements. Of course, no ones knows where tax rates are headed, so you may want to hedge by splitting your contributions across both a Roth and a Traditional IRA (say 50/50).

Question #3: Are Investment fees tax – deductible?

Answer: Certain IRA administrative fees, whether or not you’re currently taking distributions, are deductible, but they have to be paid by the account owner’s non-IRA funds. Investment fees paid to produce taxable income are tax-deductible. These expenses are miscellaneous itemized deductions subject to an overall reduction of 2% of adjusted gross income. The key to deducting the IRA fees is to cut a check or use a credit card to pay the advisor management fees. For example, if your advisor charges you $150 for the IRA annually, you need to pay this to the advisor from non-IRA assets for it to be deductible. The payment is not considered an additional contribution, but rather a miscellaneous itemized deduction. On the other hand, if your advisor charges a 1 percent-of-asset-value fee to manage your IRA, these fees cannot be reimbursed to the IRA. That would be considered an additional contribution as it is not an administrative fee. Since your advisor is deducting this from your IRA, this investment charge is not deductible to you as it is coming out of pretax dollars.

Question #4: What are qualified education expenses?

Answer: Qualified expenses are amounts paid for tuition, fees and other related expenses for an eligible student that are required for enrollment or attendance at an eligible educational institution.

Question #5: What are the tax implications of withdrawing money early from a retirement account?

Answer: Withdrawing money early from a retirement account comes with a 10 percent tax penalty plus regular income tax on the amount withdrawn. Watch out if that additional retirement money bumps you into the next tax bracket, which could affect Social Security taxes and other considerations.

Estate Planning

Establishing a Trust

One tool at your disposal during estate planning is the trust. By establishing a trust, you can ensure that there is money allocated to supporting young children before they are old enough to handle it themselves. A trust is also a key instrument in helping you minimize estate taxes. If you anticipate having assets of at least $100,000, you can use the trust to shield income from these assets from estate taxes. As you can tell, it could be worth a lot to you and your heirs to do a little planning ahead.

Keep Good Records

Another key facet of estate planning is keeping good records, not just of your assets, but also documents that describe your wishes. As an example, your will should outline who you want to inherit your assets after you die, as well as who you’d like to manage your finances or make medical decisions for you in the event that you are incapacitated. These documents are also helpful because they reduce the time and expense of estate settlement, which makes it easier on your heirs.

If you have worked with someone in the past, and you think your estate is properly structured, it may not be. There have been substantial changes in estates laws and taxes in the last couple of years and your plans may no longer accomplish what you think.  Also, it’s like that your situation has changed dramatically since you last examined this part of your financial picture.

Creative Planning


Trusts




Wills


To schedule a time to discuss your financial future, contact us at jason@financialdetox.com or call us at (877) 707-8889 today!

By contacting us, you may be offered information regarding the purchase of investment and insurance products.

Your investment advisor is not permitted to offer, and no statement contained herein shall constitute tax or legal advice. You should consult a legal or tax professional on any such matters.


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E-mail: jason@financialdetox.com

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Carlsbad, CA 92011


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