The Belichick/Patriots Approach to Tax Planning
With the Patriots in full swing, we thought this would provide an interesting way to frame tax planning.
With the Patriots in full swing, we thought this would provide an interesting way to frame tax planning. With Belichick at the helm, I always think that his process is his most valuable commodity. The Pats get off to slow starts quite often in my eyes, but their September team is often completely different from their December (and beyond team). They show progress and are constantly innovating. It’s great to think of your tax planning in a similar fashion. This year’s long-term plan could be affected by new legislation, newfound wealth, new transitions, etc.
Investing is a long-term game and even the best-laid plans can hit roadblocks along the way. Doing everything right and being prepared can’t always save you from the unexpected, but it can help ease the transitions and smooth bumps that could be devastating otherwise. Like an athlete who trains and trains all year to compete in the Olympics for a few minutes. A lot of time and preparation went in to be ready when the time came to perform. Life can be like that as well, we save and work and plan, and all that can change in a blink. The death of a spouse, a divorce, or selling off a business can change the rule and even the game entirely. Bringing knowledge and smart investment strategy to those three major life events can make all the difference.
Recovering Financially After a Loss
Your spouse has passed away. It is a difficult and devastating time and can leave you quite vulnerable. It can also be a complex and costly one for your finances. Common advice is to take your time, allow yourself to grieve and not make any major financial or life changes that first year after the loss. It’s an emotional time and the choice, be it to sell a family home, leave a job, change financial advisors, make large gifts of money to family etc. may not be in your best interests long-term. When you switch to a single filer, your deductions and exemptions also get halved. If you were not the one who handled the finances, you may have a steep learning curve as well. Having become a single filer on top of that means potentially higher taxes owed and less money for your retirement. Seeking out financial advisors you trust, who are familiar with tax codes can help. Simple advice like switching IRA’s from traditional to Roths may be a good option, as Roths minimize tax liability and remove minimum required distributions. Changing to a Roth can help the widowed spouse take control over their taxes and better budget for the future. Grief can cloud our judgment, so better to make frugal and less dramatic choices during this hard time, with the professional advice of experts that have your well-being in mind is often best.
After a Divorce
You’ve worked together, built a life together, invested in retirement savings and property, perhaps children. Now you’ve decided to separate. The costs of becoming single after a divorce can add up quickly. Where there was one mortgage, one set of utility bills, health insurance through work etc. there are now two sets. Two households need to run on the money that used to go toward one and that includes long-term retirement savings and taxes. Filing as a single taxpayer will change your tax code. How you allocate funds between you and your ex-spouse (child support, alimony etc.) will all need to be looked at to make sure you are not overpaying or missing out on a financial opportunity when your finances are so fragile and important. Most relationships have one spouse who handles the majority of the household’s finances. If this wasn’t you, it is imperative that you get educated and seek professional aid in managing your resources now and into the future.
Best to seek out legal and financial advice outside of your divorce lawyer and really focus on your financial health and future. Create a realistic budget, update your will and records, and change your beneficiaries on retirement accounts. This is a difficult time, but with a little bit of planning, educated advice, and foresight the transition can be easier for everyone.
After the Sale of a Business
Selling a business, especially one you may have built up from just a tiny seed can be a major tax expense. Based on your state and the status of the capital gains tax you may see the profit after the sale greatly diminished. Because there is also often an emotional component to selling a business, sellers do not always get the best price for the sale. On top of that, if you haven’t explored ways to reposition the company to get the highest possible return, you may be losing a huge amount to taxes. Stepping back and viewing your company with critical eyes may help, looking over your records and seeking advice from tax professionals is a good start. Some options may be converting a C Corp company to an S Corp to avoid paying a surtax on Medicaid. Other options may roll the proceeds, on a tax-deferred basis, from the sale of the business into employee stock ownership plans. Avoiding the high capital gains tax is a challenge, but taking the time to do the research and not acting impulsively can help you get the best value for your business and retain as much of the profit as possible.
Contrary to popular opinion, retiring can be a costly transition as well. It may be the end of regular paychecks, but it unlocks all the savings you’ve been working on your working life and can bump you up a tax bracket. If that money was held in traditional IRA accounts, for example, it is now able to be taxed. Social Security is taxed if it isn’t your only source of income. Accounts like 401(k) or IRAs, are taxable income once you have reached retirement age. As mentioned above, after the loss of a spouse, moving accounts like 401(k) and traditional IRAs into Roth IRAs before retirement may help offset some of that tax burden in advance. Taking advantage of tax-lowering techniques and moving around money between the years of 65 and 70 are advised. This is because, often at the age of 70, you will be forced to start collecting your Social Security and IRA withdrawals. So, making sound choices early into retirement can prevent costly errors down the line.
Life comes with all sorts of curveballs and surprises. An athlete can train and train all their lives for one epic goal, one race, one single competition. Treating your investments and retirement like a sport you’ve been training and working for may help you stay proactive in the face of the unexpected. A tragic loss, a divorce, the sale of your business, or even the act of retiring itself creates tax hurdles, unforeseen expenses and changes in the way you budget and lead your life. Knowing that in advance and be as prepared and educated as possible still can't predict the future but can help you get to the other side of whatever obstacles land in your way. Contact us to set up a time to talk about your long-term tax plan and how recent changes in your situation could create new opportunities, like potentially avoiding some capital gains or harvesting tax losses before year-end.
About the Author
I am an avid gardener, a trait I inherited from my Sicilian grandfather. Herb, cucumber, spinach, lettuce, and tomato varietals fill my yard each Summer. I am the only person in my neighborhood bold enough to plant vegetables in the front yard (best sun). Get me talking about growing tomatoes and the conversation might never end. The garden is a special place for my two daughters and me. We chase each other around the eggplants, search for cucumbers hiding under the vine, dig for worms, and pluck tomatoes just as they show a tint of ripeness.