Tax planning is an ongoing discipline – waiting for year-end means missing out on real opportunities

Personal and business circumstances are always evolving, presenting opportunities to balance or adjust short-term activities that support a long-term strategy

As we head into November, the weight of year-end tax planning starts to bear down on individuals and business owners. Often, this time of year signals a rush of backward-looking assessments and last-minute adjustments to minimize tax payments that will come due in the Spring.

To make the most of those year-end adjustments, though, taxpayers are best served by thinking about planning as an ongoing, year-round exercise. Of course, personal and business circumstances are always evolving, which presents opportunities to balance or adjust short-term activities that support a long-term strategy. In order to effectively plan, CPAs and advisors need to develop a broad awareness of a taxpayer’s specific circumstances and optimize their plan with respect to current trends, tax rule changes, and tax strategies.

The first breakthrough for “year-end” planning, then, occurs when taxpayers are comfortable enough to be completely open with their advisors about their personal financial situation and goals. Advisors can then put real, impactful information into the context of the current tax and economic landscape.

Tax planning is not an isolated event that centers on one family member’s income at one time of the year. It can affect the entire family and must be woven into a customized and comprehensive plan. Moves to minimize an individual’s taxes for one year, for example, may negatively impact investment portfolios, business decisions, or real estate management.

Here are a few things to bear in mind when tackling year-round tax planning:

Have regular touchpoints with advisors throughout the year so that changes don’t become surprises. A marriage, the birth of a child, divorce, business developments, a sale of an asset (investment, business or real estate), and virtually every life event may have some bearing on the planning process.

If taxpayers and CPAs engage regularly, they will be in a position to continuously assess how short-term and long-term needs fit into the big picture. Issues like education, medical, special care needs and retirement can only be addressed effectively through a long lens.

Gift planning and trust & estate considerations, for example, are best mapped out over the course of many years. Otherwise, opportunities will be left on the table and families could actually invoke unintended tax consequences for either a grantor or a beneficiary.

Unless it is part of the overall plan, avoid the temptation to “get a jump on taxes” by prepaying items like state taxes and deductions (i.e., medical and investment expenses). These deductions may ultimately end up limited due to Alternative Minimum Tax and level of adjusted gross income.

Given the constant volatility of the financial markets, taxpayers should consider how to make the most of gains and losses within their portfolio. The sale of appreciated stock incurs federal long-term capital gains, with rates that top out at 23.8% for 2015 (20% Income tax plus 3.8% Net Investment Income Tax). If appropriate planning takes place, there may be a more efficient use of long-term appreciated stock, such as using it to make charitable gifts. The taxpayer deducts the fair market value of the stock as a charitable donation without triggering capital gains tax on the appreciation.

From a business perspective, taking the long view is particularly important. Whether it’s tracking inventory levels or accounting for equipment purchases, owners can be more confident in their operational decisions when they understand how taxes play into their plans.

When succession enters the picture for family businesses, planning becomes even more critical. Owners can gift company stock – tax free – over time in order to transition the business without requiring the successor to pay for shares outright. That improves the outlook on two fronts: it alleviates the tax and managerial burdens on the owners while keeping working capital in the company.

Transferring shares is only one piece of a succession plan, and owners should start thinking through options well in advance of an exit. Such a strategy calls for significant forethought, and in the best case scenario, is part of a 5- or 10-year plan.

Year-end adjustments will likely always be necessary, especially as history shows us that some laws that will affect the current tax year may not be officially passed until the 11th hour. But taxpayers and advisors should think and plan as far ahead as possible; with a complete picture of long range goals in mind, they can adapt in real time and stay ahead of long-term needs. Tax planning is truly an ongoing discipline – waiting for year-end means missing out on real opportunities.

If you have any questions about business or personal tax planning & compliance, please contact your AAFCPA partner, or Dave McManus, CPA, CGMA, Co-Managing Partner at 774.512.4014, dmcmanus@nullaafcpa.com.

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AAF Wealth Management is a Registered Investment Adviser. Advisory services are only offered to clients or prospective clients where AAF Wealth Management and its representatives are properly licensed or exempt from licensure. This blog is solely for informational purposes. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by AAF Wealth Management unless a client service agreement is in place.