By Mike Gertsema, CEO & Wealth Advisor
Everyone enjoys a good surprise when it’s a gift, not a bill. There’s a reason our bills aren’t wrapped in decorative paper, no one looks forward to opening them. This year has been one of several surprises, many of them not the fun kind. Let’s look at some ways to plan ahead for financial surprises to take some of that financial uncertainty out of the future.
Do you remember when your kids started looking at colleges? They were so excited to get out of high school, move out of the house, and start the new adventure of the college experience.
I remember taking each one of the kids to different schools and doing the campus tour watching their body language to see if it was the college they wanted to attend for the next four years. Once they determined it was the school they wanted to attend, the next big question was cost and how to afford it.
I always had a pit in my stomach when we went to the admissions office and watched them add the costs of attending the college. Then they’d come up with that final number and inform us that it would increase annually.
The kids turned to my wife and me with the expectations of inking the deal, and the long discussion of student loans followed. They’d have to get used to a different life than they had at home and be ready for the responsibility of managing expenses and debt.
Think of going to the hospital for even a minor procedure. Going through the experience is one thing, but getting the bill is another. Most of the time we don’t know what the costs will be, let alone the results of the surgery. Life is full of these not-so-fun financial surprises, from car repair to furnace maintenance.
Income Tax Surprises
Another surprise we also have to deal with annually is our income taxes. Did we over-withhold taxes or under-withhold taxes to discover we owe a lot of money? There are so many things that happen in the course of the year that can impact our income taxes. Additional dividend income, capital gains, distributions from investments, IRA contributions or distributions, Social Security income, pension income, the list goes on, right?
In the past three years, we’ve seen some major law changes; the Tax Cuts and Jobs Act of 2017, The Secure Act signed in 2019, and most recently the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) signed in 2020.
All this new legislation is impacting your financial plan, your retirement, your estate plan, and very importantly your income tax plan. A lot of times people do a financial plan with the main goal of retirement and the software of the program generally uses the current information regarding taxes and the rates of return.
With all the changes made in the last three years, most of the assumptions used may be completely obsolete and your financial plan should be completely redone with all the new information. Your financial plan should be a living document that changes as you change or as the laws change, it’s not meant to be a once in a lifetime event.
Staying Ahead of the Surprise Curve
This year we’ve added an additional technology, Holistiplan, to help us help our clients be proactive in income tax planning instead of reactive. It allows us to provide tax guidance, not trying to replace or compete with our client’s CPA but to give helpful advice.
Most CPAs are trying to reduce their client’s income tax liability because nobody wants to pay any more income taxes than required. They may also be looking at deductions from 401(k)s, qualified charitable donations for people taking a required minimum distribution, and IRAs. The problem is, if the CPA knew the client’s complete financial picture, they’d explain the same thing that we are explaining.
The CPA is focused on reducing your income tax liability. Your financial planner is looking at your complete financial picture, which includes your goals, your risk tolerance, your income, and all of your investable assets, which is a luxury most CPAs don’t have.
Since the Tax Cuts and Jobs Act of 2017, the income tax brackets are more favorable for most clients and are set to expire or sunset in 2025, which means 2026 will revert back to the old tax code.
How It Works
We are able to download your current income tax returns, and then the software analyzes your income tax returns and comes up with actionable observations for improving your plan. It also provides you with a one-page report that explains your income tax bracket, your average income rate, and several strategies for your profile as we plan for the next year.
This doesn’t take days, or even hours, it takes minutes. So, within minutes we have your previous year’s income tax report and we can compare what’s different in the current year from the past year to determine strategies. Would you rather pay income taxes now at these rates or take your chances on the tax rates in the future?
Income tax planning is probably one of the most overlooked and misunderstood part of everyone’s financial plan. It could be a big money-making opportunity if it’s researched annually.
I see clients making three common missteps with income taxes:
- Analysis Paralysis – Most clients don’t understand income taxes and dread filing annually. They actually feel helpless and think they have no control over their income tax situation. They often hear or read about different ideas, but don’t understand it well enough to take action.
- Stopping at Your CPA – The next issue is, they think their CPA will give them advice, and in most cases they do. However, it’s usually how to reduce their income tax liability, not education on the income tax brackets, and the favorable treatment and strategies. Your CPA doesn’t have all of your financial information, just the information they need to file your income taxes.
- Not Finding Out for Yourself – Another issue is clients think their current advisor, salesperson, or broker has extensive knowledge of income taxes. When it comes to financial planning, it’s important that your advisor also be aware of your tax situation, which could mean requesting your tax returns.
At Gertsema Wealth Advisors, we’re fiduciaries, working in your best interest, reviewing your complete financial picture at a minimum of once per year to help you plan ahead for financial surprises.
This article is about surprises because I don’t like surprises, especially when they cost me money. If I plan ahead, know all the facts, and understand what I’m doing, it’s much different – especially when I understand the risk and reward.
At Gertsema Wealth Advisors, we strive to empower you to make life’s decisions on your terms. Adding the Holistiplan software to our technology stack is just another way of helping us give better advice. We want our clients to be educated, informed, and confident about their financial future.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor.