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5 common tax planning mistakes

5 COMMON TAX PLANNING MISTAKES

Gregory S. DuPont May 24, 2021

“The definition of insanity is doing the same thing over and over again and expecting a different result.” – Albert Einstein

No one wants to pay more than their fair share in taxes. Yet, many keep paying without taking a look at some of the opportunities that are out there to improve their tax picture. Taxes are going to increase under the Biden administration. Coupled with the unsustainably rising national debt, it’s inevitable. Now is the perfect time to take you tax returns to a professional and ask them: what should I be doing differently?

          Over the past few weeks, I’ve been aggressively asking current clients to do just that. By looking through their returns for missed opportunities and mistakes, there’s a few patterns that I’ve noticed. You probably see yourself in one of the following cases.

THE WEALTHY WIDOW

The case of a frugal woman that has investments growing to the point where some capital gains problems have arisen. She wants to leave a legacy for her children and grandchildren but is worried about the possibility of D.C. eliminating the capital gains step up in basis. Currently, if you die with a capital asset (such as a stock, business, or real estate) that asset goes on to your beneficiaries at the value that it existed at the time of your debt. With a lack of step-up in basis, there will be taxes due on the estate that is passed down to the next generation. Many beneficiaries might need to sell the home, or precious items in it, to pay those taxes.

You mustn’t wait until you see the tax law change to start taking action. If this woman were to wait until the step-up in basis is removed, it would likely be too late to take action to protect her estate and her family. It takes time to make these tax and estate planning changes.

THE EXECUTIVE

There has also been talks in Washington of raising the capital gains rate for people that plan on using those capital gain monies as income through retirement.

This man I talked to just the other day thought he had done all the right things. He had a well-balanced portfolio, had some Roth monies, etc. However, he also had a large chunk of his savings in a brokerage account that he intended to use for income during retirement. If the capital gains rate does increase, which is likely to happen, this man now finds himself in a whole different tax structure going forward. For example, he predicted that his money would be withdrawn at a 15% tax, but instead it might be 28%. That’s a major cut in income. Now, we have to restructure his portfolio over time to give him the same bang for his buck that he was planning on getting.

THE INCOMPETENT ACCOUNTANT

Let’s forget about the future for just a moment. Sometimes, mistakes are made when only considering the current tax structure. I was looking at a client’s tax returns recently and noticed that she wasn’t taking a few deductions that she should have been taking. Her account told her that she couldn’t take them, which was untrue. A second opinion helped her save thousands of dollars.

THE BUDDING BREWER

This is a case of a person that wants to, and is able to, turn their hobby into a legitimate business during retirement. A client of mine wanted to turn his brewing hobby into a full-fledged business. He was planning on buying a bar and already bought many materials. These were his business expenses, although he didn’t realize it. You don’t need to have a profit before you start a business, the be a business. If you can show intent to starting a legitimate business, you can claim those expenses on your tax returns.  

THE MILLIONAIRE NEXT DOOR

This is a case I often use to describe the dangers of future estate taxation. A gentleman who had built a portfolio of residential properties, and was now in his retirement years, came to me asking for estate and financial planning advice. He wants to give his properties to his children when he passes away but will be leaving them a lot of estate taxes in the process. His net worth is well more than what is protected currently for estate taxes. And currently, there are talks in Washington about reducing the estate tax exemption even further, to about $3 million. If you’re estate is over $3 million (meaning your total assets: life insurance, property, investments, everything) your estate tax will probably come in at 40%-50%. This tax doesn’t go away when you pass away, it trails the property. Ask yourself if your children are well-equipped to pay this tax when you pass away.

Regardless of what estate or tax planning concerns you have, we can help. We pride ourselves in being experts in both areas. To fully serve our clients, we’ve launched a new company, Ohio Tax Advocates. We now have the ability to provide a full range of tax services, including not just doing your tax returns for you, but also analyzing them. I advise you to meet with me, let me take a look at your tax returns and create an action plan for you. You never know how much money you could be saving until you make an appointment. Call our office at (614) 389-9711.