Insights + News + Advice

Insights + News + Advice


The value of a team approach to tax and investment planning

Doing your taxes every year is obviously important—but how should tax preparation fit into your overall financial goals and investment strategy?

For most people, tax preparation is a once-a-year activity, and the goal is clear: paying your taxes in compliance with state and federal tax laws. But tax preparation isn’t the same thing as tax planning. When you engage in tax planning, you aren’t just doing your taxes, you are taking steps to build and manage your personal wealth—and doing it in lockstep with your overall investment strategy.

At Leelyn Smith, we believe that tax-smart financial planning requires close and transparent collaboration between your tax advisor and investment advisor. Here, we highlight some of the key activities that may be part of the ongoing dialogue between members of your tax and investment planning team.

Harvesting losses strategically

When financial markets decline, the opportunity to sell investments and realize capital losses tends to surface. When you sell an investment at a loss, you can use those losses to offset capital gains, allowing you to remove some income from your tax return. If you don’t have capital gains, you can use the capital losses to offset ordinary income of up to $3,000 per year. And you aren’t required to use capital losses immediately—net capital losses in excess of $3,000 can be carried forward indefinitely until the amount is depleted.

Because you can recognize your capital losses at any time, harvesting losses gives you a powerful wealth planning tool. Suppose that in the future you want to sell an investment that has increased in value since you purchased it. However, for any number of reasons the timing of when you sell the investment is often critical. If you have a loss carryover from years before, you are free to choose the year to make the sale and reap the benefit of the loss offsetting some, or perhaps all, of the capital gains tax you would otherwise incur.

Tax-efficient asset location

Another topic that should involve both your tax and financial advisor is asset location.

On the most basic level, it may be to your advantage to hold growth stocks in a taxable account, such as a brokerage account, so you don’t have to pay capital gains until you sell your shares. Conversely, if you keep dividend-paying stocks in a taxable account, you will be taxed annually at your personal tax rate, which will likely be higher than the capital gains rate. Consequently, it may be better from a tax perspective to keep dividend-paying stocks along with interest-paying investments in your tax-advantaged accounts, such as an IRA or traditional 401(k). Of course, it is important to remember unlike your brokerage account, these accounts have annual contribution limits.

By paying close attention to tax information such as the amount of dividends and interest payments you have received, your tax professional can assess whether your investment-related taxes are trending in the right direction. If your taxes are trending high, your financial advisor may be able to suggest ways of rebalancing the investments in your taxable and tax-advantaged accounts to improve your tax positioning without negatively impacting your investment strategy.

This is just one example of asset location, but it shows the value of having tax and financial professionals working together to help ensure your wealth management and tax strategies are in sync.

Deferring gains

You can defer taxable gains by investing in an IRA, 401(k) or other tax-advantaged accounts. And if you hold an investment in your taxable accounts for more than a year before selling it, you will only pay the long-term capital gains rate, which is typically lower than your personal income tax rate.

Other strategies for deferring or reducing taxable gains aren’t as obvious—but they have a better chance of being identified if your tax advisor and financial advisor are working collaboratively. For example, at the end of the year, mutual funds distribute their annual capital gains to investors. When reviewing your portfolio, an experienced tax advisor can identify these taxable gains and communicate any concerns about them to your financial advisor, who may be able to adjust the portfolio to avoid issues. For example, your financial advisor may suggest moving from mutual funds into ETFs, which help to avoid taxable capital gain distributions.

Working together on your behalf

Time and again, clear lines of communication and a collaborative approach between our financial and tax professionals has enabled us to identify wealth management opportunities for our clients. Leelyn Smith’s holistic approach to tax and financial planning helps us to thoroughly understand your unique situation and prepare for whatever event may be next for you—whether you are saving for the future, selling a business, preparing to pass your wealth to the next generation, and everything in between.

To learn more about Leelyn Smith’s integrated approach to tax planning and investment management, please don’t hesitate to reach out to us.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.

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