Taxation Frustration: Financial Advisors Share Tips to Lighten the Load

Concerns about inflation, interest rates, and debt levels have dominated the public discourse as the world recovered from the global pandemic. Yet it’s the increased tax burden weighing heavily on the minds of many Americans.

Sixty percent of Americans feel they are paying too much federal income tax, according to a Gallup poll conducted during the 2023 tax season. Not since 2001 have consumers expressed such frustration with taxation.

Adding to the pain is the dwindling size of tax refunds. The IRS reported the average refund amount for 2023 was just $2,753, almost 9 percent lower than the average refund in the year prior.

For those who feel overstretched, tax efficiency within one’s financial plan may provide a solution. 

Tax planning is traditionally viewed in the context of how a financial plan should be implemented, per recent Vanguard research on the topic. This underscores how a tax return can double as a roadmap to a more prosperous financial future. In it, Americans can follow their cash flows and uncover insights into retirement and estate planning and much more to close in on key financial milestones.

Death and Taxes

As the old adage goes, nothing in life is quite as certain as death and taxes. Financial planners help with both. Tax should be a priority topic early on in the process when working with an advisor for the first time.

For instance, David Edmisten, CFP and Founder of Next Phase Financial Planning points out that a client’s tax bracket helps him decide whether taxable or tax-exempt bonds make more sense for their portfolio. 

Tax factors into cash flow, too, he adds. A client’s tax status can determine whether drawing down cash, using income, or selling securities is optimal for generating extra spending money.

Marguerita Cheng, founder of Blue Ocean Global Wealth, says her team collaborates with clients and their advisors on a range of tactics, from tax-loss harvesting, bunching medical deductions, charitable giving, tax deductions, and credits, to get the nobs and dials of the tax code just right for that person. 

“Even savvy clients find value in having someone to consult with so they can optimize their tax savings,” she says. “I say optimize because it is important to ensure tax diversification for clients so they can have taxable, tax-deferred, and tax-free savings for their accumulation goals.”

Business Owners 

Navigating taxes for solopreneurs and business owners can be more complex, ranging from strategies related to employee benefits like a 401(k) plan to corporate tax planning. Typically, taxes are withheld from employees’ paychecks throughout the year, and the balance is settled with the IRS when a worker files in April. 

Yet for business owners, taxes are generally paid every three months, based on their quarterly earnings. A small business financial advisor can help entrepreneurs navigate tax time with peace of mind.

“Most people, especially business owners, pay more in taxes than they need to, so this is a very important part of what we do as advisors,” says Sean Polley, Private Wealth Manager at Polley Wealth Management. “(There is) far more opportunity in fully understanding your client’s activities and business so that we can share what opportunities are available to minimize taxes.”

Now, with the U.S. economy still pumping strong as 2024 nears, small businesses may be riding a wave of bumper revenues that may trigger heftier taxes than they’ve paid in recent years. Certain tax law adjustments from 2022 are reportedly causing unpleasantly large tax bills for small businesses this year.

Jon McCardle, President of Summit Financial Group of Indiana, says there are more tax-optimizing plays open to business owners, but that also increases their complexity.

“We advise starting with basics such as a solo 401K or SEP IRA while the business is in its infancy,” he adds. “Examining expenses would be the next area of focus to ensure appropriate deductions are being taken. After the basics, more complex solutions unfold around employees, office space, and marketing.”

“Taking care of the root of your tree will go a long way to producing fruit on the tree over time,” he adds.

Go Long

Maintaining that long-term time horizon is where advisors see they add the most value. 

“The difference between tax-focused financial planners and CPAs or other tax preparers is that CPAs focus on reducing taxes right now, whereas financial planners concentrate on reducing lifetime taxes,” says Chris Chen, Wealth Strategist at Insight Financial Strategists. 

As Vanguard’s research outlines, the four pillars of tax-efficient planning are threshold planning, capital gains optimization, income exclusions, and deductions. 

“Many of the tools for tax planning Vanguard refers to are well-known,” says Chen. “(But) implementation can be more difficult than reading the article as it requires actual planning and is assisted with software.”

Nearly half of Americans are choosing software solutions at tax time. In a 2023 survey by GOBankingRates, 44 percent said they planned to use tax software, while 18 percent said they would engage a CPA to file their returns. Regardless of which, however, having a guiding strategy that lasts decades, not year by year, can hold people in good stead for greater financial security. 

Tax optimization can be a complicated affair, and, depending on individual circumstances, requires expert input. All US taxpayers have the right to pay the least amount of tax possible.

Without understanding the ins and outs of the tax code, consumers run the risk of handing over more money to the government than required, or worse yet, running afoul of the law. 

By taking a long-term view of the issue and designing an investment strategy with the help of local financial advisors knowledgeable in federal and state tax obligations, many Americans can lighten the load of their tax burden and set aside more money for their family and future.