Is Your Tax Strategy Keeping Up with Your Life?

Shared experiences and values keep us in relationship with family, even as our families begin to branch out in new directions.

If you have a 529 plan for your college-bound kids or grandkids, check the plan document before taking distributions to make sure you're using the funds for 529 eligible expenses. If you're paying for a college student's health insurance premiums out of pocket, ask your tax advisor if it makes sense to itemize the cost of the premiums as a deduction for the current tax year. If your kids have permanently moved out of the house and you're thinking about downsizing, consider whether the house sale could saddle you with a tax bill. If it might, discuss ways to minimize the impact with your tax advisor.

Getting married later in life often means merging two substantial financial worlds. Every couple will come up with their own answers, but meeting with a tax advisor and financial planner can be a good place to start before making important financial decisions.

If you decide to file taxes jointly, you could find yourself in a higher tax bracket, necessitating adjustments to your tax withholding. The IRS expects you to submit an updated Form W-4 with your new marital status to your employer within 10 days of your marriage date.

Efficient tax planning during a divorce can ensure that both partners retain as much wealth as possible. Key considerations include the division of jointly held property, including residences, investment accounts, and retirement accounts.

Once your divorce is finalized, you may need to update your withholding based on your individual income and filing status. You have 10 days from your divorce date to file an updated W-4 declaring your new single status with your employer.

If you change your name—for marriage or divorce—report it to the Social Security Administration (SSA) and your employer prior to filing your taxes. Your tax refund could be delayed if the name on your tax documents doesn't match the one on file with the SSA.

Our career paths are rarely linear. As your income fluctuates, so might your approach to taxes and tax-efficient saving.

If your tax bracket has gone up, focus on strategies to manage taxable capital gains or investment income. Conversely, if your tax bracket has gone down, it might be the optimal time to consider a Roth conversion.

If your current retirement savings are primarily held in tax-deferred accounts such as a 401(k) or IRA, look for opportunities to diversify your account types. For example, if you now find yourself in a lower tax bracket, consider supplementing those savings with taxable and tax-free savings options that may be available from your new employer, including Roth 401(k)s.

At all stages of life, it's important to set a goal for retirement savings and check in periodically to see if your savings levels are on track to meet your future income needs.

Estimate your future retirement income needs and track your progress. If you need to save more, look for ways to reduce expenses and boost your savings. If you're 10 years or less from retirement, it's a good idea to meet with your tax and financial advisors about when and how you'll begin to make withdrawals to manage taxes in retirement.

Tapping your assets in the right order of withdrawals can improve your tax efficiency. Generally, you'll want to start with your required minimum distributions (RMDs), then tap interest and dividends from your taxable accounts, and cash out any maturing bonds and CDs. If you still need additional income to cover your expenses, withdraw additional assets from your accounts, ideally in consultation with your tax advisor about which accounts make the most sense for your situation. Finally, save your Roth accounts for last to potentially maximize the amount that can be withdrawn tax free.

If you no longer receive a paycheck from which taxes are automatically withheld, you may need to make estimated payments to the IRS throughout the year. Some income sources, such as IRAs, Social Security, and annuities, allow you to elect to withhold a certain percentage of your distributions for tax purposes. But if you sell any assets for a capital gain, your brokerage generally will not withhold any tax from the proceeds, which means you're on the hook for making payments on estimated taxes.

An inheritance can give you more options for meeting long-term goals. Give yourself time to emotionally process the inheritance before creating an action plan.

Don't make any large purchases right away. Instead, consider whether you need to earmark some of the inheritance for emergency funds—keeping 3 to 6 months of liquidity on hand is often a good starting point. Also, if you have any high-interest debts, especially credit card balances, make paying them off a top priority. 

If you inherit a Roth account, consider leaving the assets in the account for as long as possible so you can potentially benefit from tax-free growth and withdrawals. If you inherit tax-deferred accounts including traditional IRAs, work with your tax advisor and possibly an estate planner to weigh your options, as the distribution rules can be complex for non-spouse heirs. 

If you don't need the money for retirement income or other financial needs, gifting assets to a family member or charity can be a meaningful way to share an inheritance. For family members, consider ways to gift most tax-efficiently. You can also gift assets directly to charities or consider charitable-giving vehicles such as donor-advised funds.

Nothing is ever permanent in the U.S. tax code. While some changes are relatively minor, such as annual cost of living increases to contribution limits for retirement plans, others can be more impactful on your tax bills, such as changes to state and local tax deductions. Your tax advisor and financial planner can help you fine-tune your tax plan based on changing federal, state, and local tax laws.

Life is complex and multi-faceted, requiring a financial plan that's dynamic enough to see you through different seasons. To ensure your plan stays in sync with your needs:

• Stay alert to what's changing in your life, so you can start more meaningful conversations with your trusted advisors about when and how to update your plan.
• Stay informed about your retirement savings and future opportunities for making withdrawals, so you can create a more resilient and tax-efficient income stream.
• Stay flexible in your approach to retirement income, so you can adjust your tax plan to accommodate unexpected financial needs or life events.

In our next article in this series, we'll discuss when to get a second opinion about potential tax management and financial planning solutions, as well as the types of financial experts who can help you make more tax-efficient decisions in When Do You Need a Wealth Advisor?