By the time your tax return is prepared, many of the decisions that created your tax bill have already been made.
For high-net-worth families, that distinction can matter.
Income has been earned. Investments may have been bought and sold. A business generated income. Charitable gifts were made. Assets changed hands. Distributions were taken.
Tax preparation is generally focused on reporting what has already occurred. Many CPAs also provide valuable forward-looking tax planning, but that planning is most useful when they are aware of significant financial decisions before they happen.
So, what about the decisions that haven’t happened yet?
That’s where proactive financial planning with tax considerations in mind can become important.
Tax Preparation and Proactive Planning Are Not the Same Thing
Tax preparation is inherently retrospective. It documents what has already occurred.
Proactive planning looks forward. It asks what financial decisions may be coming and whether there are tax considerations that should be discussed with your tax professional before those decisions are made.
For families with significant wealth, this can become increasingly important because taxes rarely exist in isolation.
An investment decision may create a tax consequence. A business decision can affect personal income. A charitable gift may intersect with appreciated securities and estate planning. The timing of a distribution can potentially affect other areas of the financial picture.
The question isn’t simply:
“Are my taxes being prepared correctly?”
It’s also:
“Are we considering potential tax implications before significant financial decisions are made?”
Why This Can Matter More as Wealth Becomes More Complex
High-net-worth families often have multiple professionals involved in their financial lives: a CPA, financial advisor, estate attorney, insurance professional and, for business owners, potentially additional legal and financial advisors.
Each may be doing excellent work.
The potential gap is often between them.
Your CPA may not know that you’re considering a significant portfolio change. Your investment advisor may not know you’re planning to sell a business interest. Your estate attorney may not be aware of a concentrated stock position or significant charitable goals.
Individually, each decision may make sense.
But another important question is whether those decisions are being considered together.
That is why proactive planning is often less about finding a single tax-saving tactic and more about helping make sure the appropriate professionals are part of the conversation before significant decisions are finalized.
Before Year-End, Ask Better Questions
October can be a useful time to have these conversations because there is still time left in the year to evaluate upcoming financial decisions and, where appropriate, discuss potential tax implications with your tax professional.
Consider asking your financial team:
- Are there gains or losses in my portfolio that warrant a conversation with my tax professional before year-end?
- Are there upcoming distributions, liquidity events or changes in income that my financial and tax advisors should be discussing?
- Does my charitable giving strategy still align with my broader financial and estate planning goals?
- Are there appreciated assets that may be appropriate to discuss with my advisors as part of my charitable planning?
- Have there been changes in my business, compensation, estate plan or family circumstances that my other advisors should know about?
- Are there financial decisions we’re considering for next year that would benefit from discussion now?
- Most importantly, who is helping make sure my financial advisor, CPA and estate attorney are communicating when their advice overlaps?
That last question can be particularly important for families whose financial lives have become increasingly complex.
Your Tax Return Shouldn’t Be the First Time You Consider the Impact
There will always be elements of a tax bill that cannot be predicted or avoided, and tax considerations should not drive every financial decision.
But for families with substantial assets, business interests, concentrated positions, significant charitable giving or complex estate planning, discussing potential tax implications earlier in the process may provide more time to evaluate available options with the appropriate tax and legal professionals.
Depending on the circumstances, waiting until tax preparation to begin those conversations may mean certain planning options are no longer available for the prior year.
Your tax return tells you what happened.
Proactive planning asks what decisions are still in front of you.
Don’t Wait Until Tax Season to Start the Conversation
At Finley Davis Private Wealth, we believe tax considerations should be part of the broader financial planning conversation throughout the year.
That doesn’t mean making tax decisions in a vacuum. It means collaborating with a client’s tax and legal professionals to help evaluate how investment, estate, business, charitable and other financial decisions may intersect.
If conversations about taxes typically begin when it’s time to prepare your return, now may be a good time to ask whether your financial team should be talking before December 31.
What decisions are still in front of you?
If you have significant assets, business interests, charitable goals or a complex estate, there may be value in bringing your financial, tax and legal professionals together before year-end.
Schedule a conversation with Finley Davis Private Wealth to discuss the financial decisions ahead and where coordination among your professional advisors may be beneficial.
Integrity Wealth does not provide tax or legal advice.