Tax Planning

Welcome to this week’s edition of Wisdom and Wealth! You can check out the podcast and YouTube video for this edition below! Thank you for reading, listening, and watching!

In our recent episodes, I’ve focused on your spending and how planning for and projecting your spending over time can be a fruitful experience to measure. Often analyzing where your hard-earned wealth is going is helpful for no other reason than for the purpose of asking yourself “does this expenditure bring me clarity and joy?” I’m convinced the adage that “we buy things we don’t need with money we don’t have, to impress people we don’t like” hits way too close to home. But I talked in these previous episodes about how focusing on what you can control is far more helpful than trying to influence something you have no control over. More often than not you can create unforced errors.

Today I’d like to focus on the other thing that far too often goes ignored in the planning process. It’s the expense that we know is going to be there and yet we assume that our actions cannot influence it. I’m talking about taxes. For many folks planning for taxes is a lot like asking for their first date. You know you have to go through with the process so you just say a prayer, mumble a few lines, and hope to escape the process without having to go to therapy. Most people look at me a little funny when I say that I try to run tax projections for their plan. The reason I do this is because those dollars, while they are “invested” in a sense in your civic life, they are forever gone. The growth horsepower of those dollars is gone forever once they are spent. For many clients, it is one of the largest fixed-line items of their life whether it is property tax, income tax on interest or RMD’s or capital gains on dividends.

In a perfect world, I am able to start constructing a client’s cash flow for several years prior to their actually needing it. In the real world, many people start seeking financial advice once they are aware of a need…which can often mean they are going to pay the price of non-conformance by having to pay higher tax rates because their cash flow is inefficient.

I’ve said before, that I want clients to have a diversified tax strategy. By this I mean, I want them to have a bucket of money that they can access tax-free, I also plan for them to have a bucket of money taxed at capital gains rates, lastly, I want them to have a bucket of money that they can access at income tax rates. Now I get it, virtually no one knows what their income needs might be 30 or 40 years from now, but tax planning done today can ensure that the cash flow you put together looks mature and efficient.

When someone comes to me, I immediately look at their savings today and ask: is their current marginal tax rate today higher or lower than what I can project that their marginal tax rate might be in the future? Yes, we don’t know what tax rates will be tomorrow, but we have an idea and with that we can begin the process of fulfilling their projected income need by the most tax-efficient path accessible. Many people think that simply saving as much as they possibly can is the best option…not knowing that if saved in the vehicle it is the equivalent of revving the engine of their car. It may sound cool and get looks from everyone around them…but they really aren’t getting anywhere fast.

You need to know what your marginal and average tax rates are today, what those rates will be to the best of your knowledge when you finally stop working or exit your business, what they will be when you reach age 75 or RMD age, and what they will be when you are in your later years. By planning for this, you enable yourself to start putting your resources in places that are as tax-efficient as possible.

Lastly, before I get accused of begrudgingly paying taxes let me assure you that is not the case. I actually am thankful that I get to pay taxes because that means that something successful happened!  Striving for conditions that require the payment of taxes is a lag indicator if you will of loving and serving your neighbor. Those taxes then go to the betterment of society etc. For me, taxes are an issue of stewardship. When I spend dollars it is because I need something and I’m trusting someone else a steward if you will to provide that need. Frankly, stewardship happens best when it is small, local, and decentralized. Feel free to call me crazy but it’s a core conviction. So, if I’m entrusted with a dollar I look for ways to love my neighbor by giving it to other trusted recipients who will seek ways to turn that dollar into $1.05 and do on. Okay now that we have cleared that up!

My call to action would be this. Please think of taxes over time. If you don’t know what your marginal or average tax rate will be in the future, now is the time to start planning around that and projecting the possibilities. I’ll leave things here for now. If you have any thoughts about today’s topic, please reach out at your convenience. Have a great week and remember that I am wishing you and your family continued Truth, Beauty, and Goodness on the road ahead.


Connect With Josh Klooz, CFP®, MBA, Wealth Advisor


Josh Klooz is not currently registered with or affiliated with Cetera Advisor Networks. This Newsletter is for general information purposes only and is not intended to provide specific advice or recommendations for any individual. To determine what may be appropriate for you, consult with your attorney, accountant, financial or tax advisor. Investing involves risk, including possible loss of principle. No strategy assures success or protects against loss. A diversified portfolio does not ensure a profit or protect against loss in a declining market. Unless otherwise noted, guests of the Wisdom and Wealth Podcast are not affiliated with CWM LLC.

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