Fishing for Tax Relief

Hypothetical Case Study:

Mary (42) and Ted (45) with two children ages 9 and 13.

 

Initial Objective

Mary is a business owner and her spouse, Ted, is a teacher at a public school. They were starting to expand their income and were looking for ways to minimize taxes from a recent sale of a rental property.

 

The Challenge

Their current financial advisor focused on just their investments. The advisor did not ask big picture financial questions to discover other areas in Mary and Ted’s financial life that were being impacted. Mary and Ted began to wonder if they had any unforeseen holes in the boat.

 

The Conversation

Mary and Ted were successful individuals by any measure. They earned good salaries and were disciplined savers. They both found the deeper details of finance to be somewhat foreign and neither found it particularly interesting. They preferred to focus on their careers and other areas in their life that brought them joy. Both were busy professionals and weren’t interested in getting bogged down trying to figure everything out on their own. However, they astutely understood the importance of an all-encompassing plan that offered them financial flexibility.

 

The Discovery

• Mary opened her business 4 years ago and had yet to implement any form of a retirement plan. Doing this would allow her to make a contribution of 25% of her wages. Her salary was $150,000, which would be a contribution of $37,500. With their assumed effective tax rate at 20%, this could amount to a tax savings of approximately $7,500.
• Ted, being a teacher at a public school, has access to two retirement programs (403b & 457). If he contributes the maximum to each ($19,000 per for 2020), this would be a total of $38,000. With an assumed effective tax rate at 20%, this could amount to a tax savings of approximately $7,600.
• These two strategies would also help reduce the overall family income, and help them save on the $200,000 capital gain from the property sale. Instead of paying the 20% tax, with some of these income reducing strategies, the clients may only pay 15% in capital gains on the sale. This may save the client approximately $10,000 in taxes.
• It was discovered this family did not have a Will in place. They should be introduced to an estate attorney who could draft the necessary documents to make sure all their final wishes would be honored.
• Mary and Ted should also consider the following:
  • Setting up automatic savings programs
  • Reduce investment costs when possible
  • Improve asset allocation to better position their money with their desires
  • Restructure and improve debt through refinance or consolidation
  • Reduce future taxes through charitable giving, ROTH conversions, college savings programs, etc.