You’re ready for tax help

In this episode, hosts Whitney Reagan and Dan Sharkey discuss the dive into the often-overlooked necessity of proactive tax planning. They discuss how to recognize when your financial situation calls for deeper tax optimization and why a thoughtful review of your tax return is one of the most valuable tools for long-term wealth management.

Learn how to go beyond simple deductions by aligning your portfolio structure with your income sources, coordinating effectively with CPAs and managing the intersection of income and estate taxes. Whether you manage your own taxes or work with a professional, discover how a forward-looking, integrated strategy can help you with reducing your tax burden and making more confident financial decisions.

Transcript

Daniel Sharkey: One of the biggest questions we get is naturally around taxes. And that’s why this episode is for you.

All right, we’re back, here we are: dynamic duo. At least that’s what we call ourselves. And we’re here to talk about taxes today. So, everyone strap in. I know it’s everyone’s favorite topic. Whit, how are we doing today?

Whitney Reagan: I’m great. It’s our self-proclaimed nickname, Dynamic Duo.

Dan: That’s right. Yeah. Nicknames are always better when you give them to yourself. That’s always a—I think that’s cool, right?

Whitney: It is. It’s cool. And it usually never catches on.

Dan: No, it definitely doesn’t. Well today we’ve got an extra special topic and I say extra special and I mean extra boring. But it’s probably the thing that we get asked about the most. So, this is not going to be a masterclass in taxes. But the question that we’re here to kick around, as we all look at our tax bill and cry ourselves to sleep, knowing how much the government takes of our money, we’re here to figure out when do you know that you need to do some tax planning?

I know that’s a broad topic, but we’re not going to talk about specific techniques, but just some indicators that you should have when you’re facing an inordinate amount of tax due, or you feel like you’re just not kind of optimizing a way around. So to kick it off from a tax standpoint, what are some of the things that you talk to clients about, that you look for and that you put into practice at a high level to make sure they’re optimizing their taxes in a way that reduces that burden.

Whitney: Well, first of all, I think that we are in the right profession because I was with a prospect the other day and I was going through—I love reviewing tax returns. I don’t know what it is about it. I’m not even joking.

Dan: I know, me too. It’s great. It’s the best. And just so everyone out there knows, if there’s one document that you can give any Mariner advisor that you work with or that you meet, it’s that.

Whitney: It’s that. It gives most everything we need to know.

Dan: It’s got everything. It’s like Christmas for financial planning nerds.

Whitney: Yes. And just digging in. Unpacking. It is like Christmas. And I was walking through an analysis of the tax return, and this individual was like, you’re having way too much fun with this. You really like this stuff, don’t you? And I’m like, yeah, you don’t?

Dan: I mean, when we talk about value add, the ability for someone to review your return, explain it in plain English, highlight some certain things in a very condensed way. That in and of itself is just tremendously valuable.

Whitney: Yes. For starters, I think just making sure they are looking at the deductions. Are we taking the right deductions? Are we taking the standard deduction? Can we take more of a deduction? And talking, looking through those. Because I think those are kind of low hanging fruit. What do you think is something to start off with?

Dan: I think you hit the nail on the head. I think deductions are tremendously important. I also think identifying what the sources of their income actually are and just how those play together. Are you getting a lot of capital gains distributions? Does that mean that your portfolio is potentially inefficient?

Do you have a lot of ordinary income outside of your W-2? Where is that deriving from? Really understanding what income is flowing through is a hugely important part. And I’ll give you a very easy example, just talking about the portfolio.

Whitney: Yeah. Okay. So, if you have qualified versus unqualified dividends I mean that just—

Dan: Just understanding what those are. What we spend a lot of time on in the portfolio specifically, and then we’ll talk about how other income flows through, particularly if you’re a small business owner, which we could do a whole episode on in and of itself. But that’s a topic we’ll touch on briefly.

But if you look at your return, you can see very quickly whether or not—even without seeing their investment statements—whether or not their accounts are allocated correctly. And the reason for that is a lot of people, when they first meet us and they’re looking for guidance and really looking for that level of expertise, a lot of their accounts look the same. They may have a taxable account, a traditional IRA and a Roth, just to use the standard account types that we typically see. And it’ll be a 60/40 portfolio, and every account is set up exactly the same.

Whitney: Has the same holdings and everything.

Dan: Correct. Everything has the same holdings.

You can be very strategic about what assets you hold and what type of account based on that tax structure, and that will flow directly through to your return.

So even something as simple as that, as the ability to understand where the income is coming from and what how the accounts are structured is hugely important to improving someone’s outcome. The other thing is making sure that for any taxable assets, that you’re just being hyper efficient in the approaches that you use. There are a lot of things that you can do.

If you’re a W-2 employee, your options are more limited. They really do have to be focused on where your income is coming from, what the deductions are. Are we maximizing any employer options or plans that we can execute? But as your income gets more complicated—for example, if you have a real estate business, if you have a second home, if you have any side hustles, that is creating self-employment income—that is the jackpot of advanced tax planning.

If you sit on a board of directors, if you have any 1099 income, those types of solutions that are available to you, whether it’s a SEP IRA or a solo 401(k), or a cash balance plan, there are so many things that you can do once we understand the nature of your income. If you feel confused or overwhelmed by the amount of money that’s going out to local, state and federal agencies and governments, then you definitely need to talk to someone.

That ability to communicate to clients, not only this is a good idea, but here’s why this is a good idea.

With tax planning, the biggest takeaway that I want you to have is, yes, there are clients that we work with in which we have one moment of genius in which says, man, this, this perfect tax strategy works great. All the stars align and it’s nailed. I’ll give you an example. I have a client, dear client of mine, who sits on several boards of directors, and we put a cash balance plan in place.

He was 62 at the time, $300,00 or $400,000 of income. We were able basically to defer all of that income and do Roth conversions along the way. So, these are the small decisions in between.

So those are kind of lightning in a bottle, everything aligns. However, most people will materially benefit not from one single moment of brilliance or stroke of genius, but through little decisions that they don’t necessarily know that they’re making. And when you accumulate those together, that’s where you get this material reduction.

And at almost the point where, you know, we’re materially reducing the cost of working with someone. Now, that’s not the objective. It’s a potential side benefit. But the amount of money you can save in taxes by a thoughtful review is truly, truly profound, and I wish more people understood how much that matters and how someone professionally can help you optimize that to the greatest degree possible.

Whitney: And I think the way that we can add value as wealth advisors or if you, as the audience, would like to talk to an advisor, is that we are more forward looking and we’re taking your tax return, that’s like Christmas morning, and we dig into it. But then we’re projecting out, okay, how can we reduce your taxable income?

How can we be more efficient in the future? And that’s when we work with the CPAs too. Where the CPAs are doing that backward looking point in time, we’re collaborating with them on what can be the future benefit of using these techniques or tools.

Dan: Absolutely. And I think that’s a hugely important point that I want everyone in the audience to highlight. We work with a lot of great CPAs. We do thousands of tax returns ourselves. We have that capability internally. But the important point is if you have a CPA that you like, we don’t displace your CPA. We make sure we partner with them to come up with the best idea possible of what comes next.

And I think that’s hugely, hugely important is that these techniques work in conjunction with who else is serving you in your life. And I think that should make people feel very confident that they have a full team around them to make sure that they’re executing this importantly.

Let me make one other quick point. And I know we haven’t spent too much time talking about this type of tax, but also estate tax. We’ll have separate episodes on estate planning and things like that. And this is primarily focused on income tax planning. But I just want to make one quick point. What we’re talking about now is primarily about people who are still in their earning years and have just retired.

But for people who are older, who are maybe in their 70s and 80s are thinking about how do I get more efficient with my income tax, but I also might have an estate tax. Make sure that you never view either one of those entirely in isolation. As you get older, you may have largely appreciated stock.

You have RMDs, you have charitable planning, you have all these different types of things. You also have a potential estate liability. But if you are looking to reduce that, just make sure that you get a qualified opinion on how that does affect your current income tax, because you could be doing anything that would theoretically reduce one or the other, but that’s really not optimal for passing the most wealth on to the next generation.

So just remember that those are two parallel systems, that they don’t necessarily play nice with one another, and you have to have an eye on both if you’re going to find a really optimized solution.

Whitney: I think that’s another value that we can add is really just being that coordinated advocate for them to make sure everything is talking to each other in the most efficient way. And one last thing that I will mention too is I have a lot of clients that actually do their own tax return, which I think is a fine approach.

But what I do recommend is getting advice from an advisor, getting advice from a neutral party to give you another set of eyes looking at if there’s a way to do an analysis, to maybe bring down that tax bill. And really look deeper into it. Because even though you don’t think you’re going to mess it up, you also have an emotional tie to all of that money and everything, it’s all connected to you.

So, it’s nice to have that neutral third party to have at least an extra review.

Dan: Absolutely. So, if you want to do your own return, that’s great. But definitely lean on an advisor who knows the rest or part of your plan to really give you some feedback on what you could potentially be doing differently.

And some of the key things look for—if you’re getting a huge refund. If you owe a lot. Those are things that should point you—and sometimes there are these one off instances that cause those things and that’s not to worry about. But if you find yourself in a pattern, make sure you’re talking to someone, because having a second set of eyes is really important.

Whitney: Great points. I think we covered a lot of good ground here.

Dan: If you enjoyed the show, please like and subscribe. YouTube, Spotify, Apple Podcasts. And we will see you next week.

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