The financial services industry sucks at tax planning.
Especially CPA’s considering the fact that this is who most people think are covering their tax planning.
Over 23 years, I can pretty much count on one hand the amount of people who are actually doing even the minimum of tax planning.
Why is everyone so in the dark about tax planning?
I’ll list off a few reasons:
1. CPAs think that tax planning is for financial advisors, and financial advisors think tax planning is for CPAs. So then, no one does it.
2. Most people confuse tax reporting with tax planning.
Here’s how to know the difference. If you are talking to someone about last year’s taxes, that’s tax reporting, not tax planning. There is a major difference.
Tax planning is a forward-looking process that is designed to maximize the after-tax lifetime value of your wealth. And that is done by employing primitive strategies like not owning bonds in a brokerage account, backdoor Roth conversions, using passive real estate for tax benefits, and perfectly timed realization of gains and/or income during very specific years of retirement.
But none of that is about last year’s taxes. It’s about the next decade’s taxes, which is where taxes can really add up.
3. People believe that tax planning is all about trying to pay the least amount of taxes every year. But good, effective tax planning requires the understanding that if you are paying the least amount of taxes every year, then you are NOT paying the least amount in taxes over your lifetime.
It sounds strange, but it’s absolutely true.
Think of trying to pay the least amount in taxes every year like a fad diet that causes you to lose muscle mass in the process. It may seem great in the short term, but you have actually made your body even less efficient at burning fat.
Without a long-term strategy, neither the diet, nor the annual tax minimization we be best for you. Short-term tax minimization along will often lead to a tax trap later in life.
Talk to your advisor about shifting your tax planning goal to garner the highest after-tax lifetime value of your wealth, rather than simply minimizing taxes each year.
Remember, you have more control over your taxes than you realize. If you want to hear more, here are two resources:
- I dive more into my frustrations on the topic and give alternative viewpoints in my most recent podcast episode. You can listen to it HERE.
- I explain how each type of asset is taxed in this video: https://jonesfwm.wistia.com/medias/18q1rfvhn9
We’d like to hear from you. Email us at jones@jonesfwm.com