|Credit: Maggie Smith|
As I’ve said before, it’s my job to try to help people and to make strategic financial suggestions to the clients I serve, but I never tell people what to do. Sadly, in spite of my best efforts and persistent explanations, I’ve had several experiences as a CPA and a financial planner where the clients I serve have been unable to focus on their overall financial situation because of their obsession with a specific portion of their financial situation - usually this has to do with their taxes. That’s why I want to focus on a few tax-related issues that I have seen “wag” my clients from doing what I truly believe is in their best interest.
- Capital Gains
- I’m convinced there is nothing that gets CPAs and investment advisors yelled at more than capital gains. If clients have capital gains, they are usually mad because they owe taxes, but if clients have capital losses, they are usually mad because they have lost money. Either way, in terms of recognizing capital gains, selling out of a stock position that has gone up a considerable amount often makes sense because you are taking your gain off the table and giving yourself the opportunity to buy a different stock position that has more potential for future, additional growth. Yes, you’ll have to pay taxes on the amount the stock position went up or appreciated, but isn’t that better than the alternatives? If you wait for the stock price to go back down before you sell, you probably won’t owe any taxes, but you also won’t have any gain, and if you’re not willing to sell the stock during your lifetime, what good is the stock to you in the first place (unless you plan on charitably gifting it or specifically bequeathing it)? No matter the stock or investment, there comes a time when it makes sense to sell your position, take your gain, and run. Please don’t let capital gain taxes solely wag you from considering taking that gain.
- Income Timing
- Some people have jobs with steady incomes, and their tax picture is about the same every year. Some people have jobs with fluctuating incomes; some years they will be in lower tax brackets, and some years they will be in higher tax brackets. Whether still actively working or retired, by taking a multiple-year view towards your income stream, you can attempt to manage unusual “bursts” of income, such as stock options, lump sum pension payments, deferred compensation payouts, IRA distributions, and annuity distributions, in a tax-efficient manner. The problem is that some people want all of their money at once and give Uncle Sam a massive portion of their income, as opposed to cumulatively giving the government less if income is more evenly spread out. There are also people who want to pay as little in taxes as possible every year and keep putting off stock option exercises, distributions, and payouts until they back themselves into a year when they have no choice but to give Uncle Sam a massive portion of their income. As usual, there is often a sweet spot in the middle where by prudently spreading out your income you can have long-term tax savings. Please don’t let a complete disregard for income tax implications or a blind focus on minimizing current year income taxes wag you from potential tax savings.
- Having a CPA
- It concerns me how many people choose not to have a CPA prepare their taxes. I know tax preparation fees can be high, but having someone who knows the latest in federal and state tax laws, gift tax laws, and estate tax laws is invaluable. Having the ability to point your finger towards someone else should there be an issue and the IRS comes calling is nice, too! If you don’t have a CPA, I would strongly encourage you to consider finding one unless you know all about the Georgia Retirement Income Exclusion, the changing AGI threshold for itemized medical deductions, and how to plan on utilizing the portability of your now inflation-adjusted estate tax exemption. I know, TurboTax and its brothers are great, but accidentally misusing tax software does not excuse you from any errors or penalties that may be related to those mistakes. As the Tax Court said in a case back in 2000, “Tax preparation software is only as good as the information one inputs into it.” Please don’t let the fees of having a CPA prepare your taxes (which are likely tax deductible) wag you from having your taxes done as correctly and as efficiently as possible.
Taxes are the main “dog-wagger” I see, but there are others. Trying to save too much money too fast by shortchanging your quality of life is letting your savings goal wag the dog. Trying to pay down debt too fast by jeopardizing your emergency fund is letting your debt reduction plan wag the dog. Trying to max out your 401(k) contributions by cutting your ability to comfortably pay monthly expenses is letting your investing strategy wag the dog. I could go on and on.
Get some popcorn, watch the movie, and try to remember that just as a dog should wag its tail, your overall financial situation should drive your specific financial decision making.