A Webinar Recap – Tax Planning: 5 Ways to Make the Most of Your Tax Return

Discover how your tax return can be used as a strategic planning tool to maximize financial opportunities.

From Annual Chore to Financial Core

Millions of Americans file their tax returns every year, often viewing them as nothing more than an annual chore. However, these documents are not just bureaucratic necessities—they are treasure troves of data that can illuminate the path to enhanced financial well-being.

In our recent webinar, Tax Planning: 5 Ways to Make the Most of Your Tax Return, we explored how you can transform your routine tax return into a strategic financial planning tool. The Hunt Valley Wealth team unpacks their expert advice and provides actionable steps to leverage your tax returns to maximize your financial opportunities.

According to a study by the National Association of Personal Financial Advisors (NAPFA, 2021), effective tax return analysis can lead to better financial decisions and increased wealth accumulation over time.^[1]

As Christina Garland, Senior Wealth Advisor here at Hunt Valley Wealth, states, “Most people feel a sigh of relief after completing taxes, but we find this is the best time to look for planning opportunities, so don’t file those tax returns away just yet.”

5 Ways to Make the Most of Your Tax Return

A tax return is more than a record of what you’ve earned and owed—it’s a snapshot of your financial year. Each number tells a part of your story, and every deduction you make is a deliberate choice that shapes this narrative. By understanding these details, you transform a routine chore into a powerful tool for financial management. As discussed in our recent webinar, let’s explore 5 different ways to make this chore a part of your financial core.

1. Prudent Savings Habits: Understanding Your Tax Return as a Planning Tool

Saving for retirement is essential not only for securing your financial future but also because it has significant implications on your current tax situation. By understanding how contributions affect your tax return now and how withdrawals will affect your taxes in retirement, you can make more informed decisions that balance your current needs with your future goals.

Jay Schuman, CFP®, a Wealth Advisor here at Hunt Valley Wealth, explored the importance of saving for retirement and its implications on your tax return. He highlighted the importance of differentiating between the different ways you save; after-tax, pre-tax, and Roth investment contributions to optimize tax benefits and retirement outcomes.

After-Tax: Individual, Joint, Trust Accounts
Pre-Tax: Traditional 401(k), 403(b) Plans, Traditional IRAs
After-Tax: Roth 401(k)/403(b) Plans, Roth IRAs, HSAs & FSA

Building on savings habits, let’s examine how asset allocation minimizes one’s tax burden and maximizes one’s bottom line.

2. Tax-Aware Investing

Research in the Journal of Financial Planning suggests that careful consideration of asset location can significantly reduce tax liabilities and enhance retirement readiness.^[2]

Matthew Cheney, CFP®, CPWA®, CIMA®, Senior Wealth Advisor here at Hunt Valley Wealth, elaborated on the crucial asset location strategy. This technique is vital for reducing tax burdens and enhancing financial growth. Asset location involves strategically placing investments in accounts that offer the most tax efficiency based on the asset type: stocks, bonds, or cash.

Understanding Asset Types and Tax Implications:
- Equities in Roth Accounts
- Bonds in Traditional IRAs
- Assessing the Tax Bracket Strategy
The Impact on Medicare Premiums and Tax Returns:
- Medicare Considerations: Asset location can also influence Medicare Part B premiums, which are adjusted based on income. Retirees can potentially avoid higher premiums by strategically managing which accounts they withdraw from.
Continuous Portfolio Review:
- Dynamic Financial Planning: Annual reviews and adjustments in response to changes in financial situations, tax laws, or personal goals are critical for maintaining optimal tax efficiency and achieving financial objectives.

3. Proactive Tax Planning: Optimizing Your Financial Future

During the webinar, Jay pointed out that most individuals tend to file their tax information once the season ends, overlooking the golden opportunity to plan for future financial benefits. Proactive tax planning involves using your past tax returns as a roadmap to understand and anticipate your financial needs, helping to adjust real-time strategies based on past data.

Utilizing Tax Returns for Future Planning
Adjusting to Income Changes
Capitalizing on Lower Tax Brackets in Retirement
The Role of Roth Conversions

Regular communication and updates with financial advisors are just as important as they ensure that clients’ financial plans remain aligned with their evolving financial situation and the ever-changing tax laws. So, make reaching out to your financial planner a part of your routine and not just a part of tax season.

This proactive approach safeguards against potential financial pitfalls and capitalizes on opportunities to enhance one’s financial standing. Now, let’s explore advanced tax strategies.

4. Advanced Tax Strategies: Rothification

Matt Cheney dives into one of his favorite subjects, Roth conversions. This process, affectionately referred to as “Rothification,” involves transferring money from traditional, pre-tax retirement accounts into Roth accounts, which offer tax-free growth and withdrawals under certain conditions. Key areas to consider:

Timing and Income Considerations: Timing Roth conversions is key, as they may not be beneficial for those in high-earning years due to higher tax rates but can offer significant advantages post-retirement by potentially placing retirees in lower tax brackets and reducing tax impacts.
Strategic Conversion Benefits: Roth conversions offer benefits beyond tax savings, such as reducing required minimum distributions for older adults, which can lower their taxable income and potential tax rates during retirement.
Legacy Planning: Roth conversions provide substantial estate planning benefits by protecting non-spousal heirs from high taxes on inherited IRAs. Under the Secure Act, inherited IRAs must be withdrawn within ten years, but withdrawals from Roth IRAs are tax-free.

Practical Implementation: This involves making non-deductible contributions to a traditional IRA and then converting these to a Roth IRA, thus building up the Roth “bucket” over time.

5. Charitable Giving

In the webinar’s final segment, we address the dual benefits of charitable giving.

Jay Schuman states, “Charitable giving in its purest form is an altruistic act, but that doesn’t mean it can’t be financially advantageous, especially when it comes to taxes. So a lot of times it’s great to be able to combine both the good of making donations to charitable causes and at the same time benefiting you when it comes to tax time”.

There are several tools for charitable giving, each designed to optimize tax benefits while supporting philanthropic goals. Here’s what each tool does:

Donor Advised Funds (DAFs): Allows individuals to make charitable contributions and receive an immediate tax deduction for the year the donation is made.
Qualified Charitable Distributions (QCDs): This option enables individuals aged 70½ or older to donate up to $100,000 directly from their Individual Retirement Account (IRA) to a charity without the distribution being included in their taxable income.
Charitable Bunching: A strategy where taxpayers bundle multiple years’ worth of charitable donations into one year to surpass the standard deduction threshold, thus making itemizing deductions advantageous.
Charitable Remainder Trusts (CRTs): An irrevocable trust that provides the donor or other beneficiaries with a stream of income for a period, after which the remainder of the donated assets goes to designated charities

Now that we have reviewed charitable giving, let’s review what we learned.

Conclusion

Our panelists provided a comprehensive overview of how to use your tax return proactively. Let’s review the key takeaways to make the most of your Tax Return:

How you save matters
Position your portfolio to reduce taxes
Proactive tax planning keeps more money in your pocket
Leverage Roth Conversations
Maximize the tax benefit of Charitable Giving

Use these insights to refine your financial planning, and consult with a financial advisor to tailor these strategies to your personal needs.

Watch our full webinar, now available on demand, to stay informed and proactive with your tax plan.

*Citations
1. National Association of Personal Financial Advisors (NAPFA, 2021): https://www.napfa.org/home

2. Journal of Financial Planning (2023): https://www.tandfonline.com/doi/full/10.1080/19424396.2023.2225726