Tax Planning

Tax Planning for Pre-retirees, Retirees and Government Workers Near Maryland, Virginia and D.C

What is Tax Planning?

No one likes paying taxes. Unlike standard tax preparation, tax planning is a year-round exercise. The manner in which you invest your assets, whether to utilize traditional vs. Roth retirement accounts, and how you time distributions from
retirement accounts, all will affect the amount of taxes you will pay over your lifetime. By engaging in deliberate tax planning, we can help optimize these decisions aiming to lower the total share of your resources that would end up in tax coffers. Lowering your cumulative tax liability can help fuel your financial plan to allow for a more secure and bountiful retirement.

Tax Planning Services

Tax planning is a wide-ranging discipline that encompasses every aspect of your income and investments. Here’s a list of tax planning services Ferguson-Johnson Wealth Management provides that could help lower your total tax bill:

  • Structure investments for tax-efficiency – Different types of investments have different implications for tax liability. We help determine which investments should be held in taxable accounts vs. tax-deferred accounts vs. tax-free accounts to allow the total investment portfolio to be more tax efficient.
  • Utilize tax-loss and tax-gain harvesting at advantageous times – Taxable investment portfolios lead to unexpected and unpleasant tax bills without careful tax management. We identify opportunities to manage the taxes that would be generated by these portfolios to reign in surprises on your tax return.
  • Avoid the Medicare and Social Security tax traps – Both Medicare and Social Security are social programs that are taxed based on your income. Unlike marginal tax brackets, the taxes applicable to different income levels for Medicare and Social Security are “cliff taxes”, meaning one dollar over the limit can trigger thousands of dollars in additional tax.
  • Optimize charitable giving strategies to take advantage of appreciated stock and qualified charitable deductions – There are many incentives built into the tax code to incentive those of us that are charitably inclined. By selecting specific assets to donate as opposed to writing checks to your chosen charities, you may be able to reduce your tax bills.
  • Coordinate with your accountants or tax preparer – We want to make sure one hand is talking to the other. We help clarify tax strategies so that nothing is missed on your tax return.
  • Review tax returns to identify opportunities for savings – We comb your tax return to better understand your financial situation and to see if there are any opportunities that can be used to your advantage.
  • Analyze Roth conversion opportunities – When you take distributions from traditional retirement accounts, like an IRA or 401(k), every dollar is taxable income. Roth accounts grow and allow you to withdraw income tax-free. However, paying the tax today to convert to a Roth account may be costly. We help laydown a runway to convert pre-tax balances overtime to efficiently manage your tax burden year-over-year.
  • Manage tax brackets in retirement – Based on your needs and expenses, we help determine the optimal sources for retirement income. Generally, this involves withdrawing from taxable, tax-deferred, and Roth accounts in harmony to fill up current tax brackets while avoiding the traps like Medicare surcharges.
  • Adapt to ever-changing tax policy and legislation – The tax code changes constantly. In just the past few years, the Tax Cuts and Jobs Act (2017), SECURE Act (2019) and SECURE Act 2.0 (2022) all had massive ramifications for savers and retirees alike. We stay up-to-date on legislative developments to help ensure you can make tax-efficient decisions.

Ready to take control of your finances and reduce your tax liabilities? Schedule a meeting with Ferguson-Johnson Wealth Management today to learn about tax-saving strategies for retirement and other financial planning services.

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The Difference Between Tax Planning and Tax Preparation

It’s important to distinguish between tax planning and tax preparation. The main goal of tax planning is to maximize tax savings both in the current year and over the rest of your life by making tactical and strategic decisions with your income and investments. Tax preparation, on the other hand, involves the completion and filing of your tax returns. Tax preparation services can be obtained by licensed tax preparers and CPAs.

*At Ferguson-Johnson Wealth Management, we are not CPAs and do not perform tax preparation; we solely help with tax planning.

Frequently Asked Tax Planning Questions

We offer tax planning services tailored to fit your unique needs that help answer these common questions:

1. Why do I need tax planning?

Tax planning is different from the tax preparation many of us are familiar with used to file your federal and state tax returns each year. An advisor that performs tax planning can enhance investment strategy and withdrawal sequencing to minimize the impact of taxes on your finances.

These advisors can help you make smart decisions about retirement planning, charitable giving, and when to withdraw from certain accounts to minimize tax liability, and can also guide you with strategies like tax-loss harvesting to save you money and maximize your returns. Additionally, they can help you navigate the ever-changing tax laws so that you don’t miss out on tax reduction opportunities.

2. How can I reduce my taxes when I retire?

A tax plan designed around your needs will help you understand how your taxes project into retirement. From there, we can make decisions about investments and income sources today that may benefit you down the line.

3. What are tax reduction strategies?

Tax reduction strategies refer to key moves you can make throughout the year to minimize the taxes you owe. A tax planner can help you identify which actions may work best for you and when to implement them, including utilizing year-end opportunities to enhance tax-efficiency.

Strategies may include optimizing contributions to employer-sponsored retirement plans, like a 401(k), and taking advantage of your Health Savings Account (HSA). An advisor can also help you determine which accounts should be drawn from – and when – for financial goals or retirement and how to take best advantage of tax deductible actions like charitable contributions.

4. What are the benefits of tax-loss harvesting?

Tax-loss harvesting is a tax planning strategy that involves selling securities that have decreased in value to offset capital gains and reduce tax liabilities. There are two types of tax harvesting: tax-loss harvesting and tax-gain harvesting. In tax-loss harvesting, you can use capital losses to offset gains or deduct up to $3,000 from ordinary income. For example, if you sell an investment at a loss of $5,000, you can offset $5,000 of capital gains and potentially deduct $3,000 from your ordinary income.

Tax-gain harvesting, on the other hand, involves strategically realizing long-term capital gains at specific times. For instance, if you are in the 0% tax bracket for long-term capital gains, you can sell an investment with a $10,000 gain without owing any federal taxes. Understanding and utilizing these strategies can help optimize your tax liabilities and potentially enhance your overall investment returns.

It’s important to consult with a tax planner or financial advisor for personalized guidance on tax harvesting and to determine the specific limits and benefits based on your individual circumstances.

5. How are Roth conversions helpful for taxes?

Roth conversions can offer tax advantages by moving assets from tax-deferred retirement accounts to tax-free retirement accounts. Converting from a Traditional IRA to a Roth IRA is a taxable event and taxes will need to be paid on the amount converted. However, depending on individual circumstances, it may be advantageous to accelerate income in current years to potentially pay less in taxes later on. Required minimum distributions can often be an unwelcome tax hit for many retirees. By taking proactive steps before RMD-age, it may be possible to alleviate the burden of high taxes on RMDs in the future.

Furthermore, recent changes in tax law have dramatically increased the tax burden on beneficiaries who will inherit IRAs in the future. Roth conversions may allow for more of your wealth to pass on to your loved ones instead of the government.

6. Should I convert my IRA to a Roth IRA?

Roth conversions can be very beneficial by reducing lifetime taxes paid on the growth or retirement assets. However, determining when and how much to convert each year is a critical decision point to make Roth conversions worthwhile.

7. How can I be tax-efficient when withdrawing from retirement accounts?

There are several tactics available for defraying the burden of required minimum distributions. This alongside tactical income management using pre-tax, after-tax, and Roth income, can help significantly reduce lifetime tax erosion.

About Ferguson-Johnson Wealth Management

Ferguson-Johnson Wealth Management is a Registered Investment Advisory firm that has been providing financial planning, investment management, retirement planning, and tax planning services to pre-retirees, retirees, and government employees since 1978, across Maryland, Virginia, and the District of Columbia.

As NAPFA-registered, fee-only financial advisors, we do not sell products or accept commissions or referral fees; instead, we provide personalized investment management services tailored to your needs.

If you’re ready to begin taking the steps you need to achieve financial success, then give us a call. We look forward to hearing from you.