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Tax Efficiency: Investment Planning From and Beyond the Tax Return

  • Published on Dec 12, 2018
  • by Steven R. Goodman, CPA, CFP®

Our Tax Expo speaker Steven R. Goodman, CPA, CFP® previews his presentation in the following article.  

To hear more from him and other great speakers, register for the 29th Annual Tax Expo January 7-8th at the Sugar Land Marriott Town Square here.

For readers planning to attend that session, this article serves to introduce the topic; and, for those of you not able to attend the always spectacular Tax Expo, this article will provide a few takeaways that should help you in identifying planning opportunities for your clients.

Tax-efficient planning is often overlooked, but is essential in the accumulation, growth and distribution stages of a portfolio’s lifecycle.  Often there are items seen on a tax return that suggest opportunities for improved results. Likewise, what is absent from the return may similarly provide opportunities for greater results. In the paragraphs that follow I have identified some of the items that we see as most valuable in enhancing your clients’ investment and financial planning outcomes.  While some come directly from the tax return, others may become apparent in reviewing a tax organizer and supporting documents or from conversations with your clients.

Realized Gains and Losses 
Excessive amounts of losses are likely the result of poor investing and possible evidence that the client is buying high and selling low, the opposite of what is desired.  Further, excessive transactions might be the sign of day trading and not investing, or possible churning of investment accounts.  Large gains on the other hand may be signs of investment success.  While we have heard clients bemoan having large taxable gains in years where the market has been flat or down, that isn’t necessarily a sign of a problem, but likely evidence that the client or their advisor was harvesting gains that had been deferred from prior years, and possibly been prudent rebalancing.

Large Number of K-1s from Investment Partnerships or Other Pass-through Entities – While investment K-1s add complexity and CPA time/fees, unless these are generated from entities that your client controls, they could also be evidence of excessive investing in illiquid investments.  Consider asking how the client got involved in all of these partnerships or other pass-through entities.  If they are all at the direction of a commission-based broker, your client may be investing in what is making the broker the most money and not the client.  Such K-1s may be related to illiquid real estate partnerships, hedge funds or MLPs.

Interest Income
If your client is in the top tax bracket and they have significant interest income, make bracket, municipal bond interest may be seen as a warning sign of the client accepting a lower return than they might achieve with taxable bonds.  

Dividend Income 
Lack of any qualified dividend income (which is taxed at capital gains rates) might suggest that the client’s portfolio is allocated too conservatively, and they may be missing out on investment growth necessary to fund their desired retirement goals.

Also, an abundance of dividend income and a lack of interest income might suggest that the client is disproportionally invested in equities.  While that may be appropriate given the client’s age or risk tolerance, it may also be a sign that the client has an asset allocation that is overly aggressive.

History of Large Charitable Deductions
If the client is prone to making large annual charitable contributions, given the larger standard deduction, it could be that bunching contributions every other year may be appropriate. Further, if the client is 70 ½ years old or beyond, there may be an opportunity for qualified charitable distributions (QCD) from their IRA.  Such distributions are a reduction of adjusted gross income and may have further benefits when it comes to other calculations on the return. Additionally, consideration should be given to funding charitable contributions with highly appreciated long-term capital gain stock held in a taxable account, which gets the double benefit of the charitable deduction and avoiding capital gains on the holding.

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Taking Advantage of Low Ordinary Income 
In years where a client expects to have lower than normal ordinary income, there are many planning opportunities.  Roth IRA conversions, using taxable distributions from IRAs at low rates to fund cash needs, and recognizing long-term capital gains at 0% are some of the significant planning options available for taxpayers who expect to find themselves in the bottom two tax brackets. Of course, this is on a case-by-case basis – for example, a client who has a large business loss recognized in the current year, but hasn’t reached age 59.5, wouldn’t want to take IRA distributions due to the early withdrawal penalty.  But, they should strongly consider a Roth IRA conversion for that year or utilizing an NOL carryback or carryforward for planning purposes in other years.

For a discussion of additional planning ideas, plan to attend the 2019 Tax Expo. Register here

This is an article from Houston CPA Society's Online Magazine called the Forum. Read the full magazine here. 

About the author: 

Steve Goodman, CPA, CFP® is president of Goodman Financial Corporation, a 14-person fee-only financial advisory and money management firm employing six CPAs in its execution of tax-efficient planning.

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Official Houston CPA Society’s Strategic Partner. Visit Goodman Financial Corporation website for more information.