There are many of you out there who believe that come tax season, one of your best friends is your tax preparer. The reality is while this is still a key component in the relationship, the best part happens the year prior. Often this will take place in the last quarter, but depending on your situation you may be better suited to give your tax advisor call in late summer.
The thing is, once we get to tax season there is almost nothing we as advisors can do to help your tax situation. Like other great advice, it is best received before you do something, not after.
So you may be asking yourself, “Scott what exactly you saying, I've never called my advisor before the end of the year”. Starting sometimes is early as May or June, we start to do tax projections for clients. In these appointments, we gather all the information from the prior year, discuss the current year including all the tax law changes as well as potential changes in your specific situation, and then we estimate what your tax will be based on a number of scenarios. The tax projection gives you a glimpse of what happens “if”. For example “what happens if I sell my rental property this year” or “My spouse just passed away and I am about to start retirement in a few months” or “I'm looking to remodel my home and I would like to sell some stock to pay for it” - these are all examples of questions that we have heard in the past. From here we can create different scenarios based on that information and other certain assumptions such as what your wages are, what your retirement and required minimum distribution income are, etc.
2020 has additional possibilities and benefits from a tax projection since there is a one-year reprieve from RMD's. In a normal year we may be looking at how much money you can convert from your traditional IRA to Roth IRA or how much tax withholding out of your RMD we may need to take, but with this added tax law change and potentially a couple others you're planning may change from other years’ plans.
While this is not an exact science this almost always gives you the tax preparer you in a better position to have the best tax planning possible whether that is an immediate tax savings or potentially a long-term tax strategy. I had one client who we had a seven-year plan, we were able to get the majority of his money out of his traditional IRA and into a Roth IRA. When we did, it put him in the lowest tax bracket and the lowest Medicare bracket for the rest of his life. And as the saying goes, “it is not what you make, it is what you keep after taxes” that is the key focus.