6 Ways Tax Projections Could Save You Thousands (EP.183)

0:28We all need to make smart decisions with our money. harmless decisions made without considering the bigger picture. It's not the one-time splurge or single bad investment that derails a financial plan. It's the compounding effect of missed opportunities and unavoidable missteps. This is where tax projections come in. They act like a wide-angle lens for your finances, showing you how today's decisions ripple through tomorrow's outcomes. And when they're done right, they help you spot opportunities to save, avoid costly surprises, and make smarter choices that align with your long-term goals. But here's the thing.

1:08Most people don't take advantage of this tool. They think of taxes as something to deal with in April, or maybe even just a chore rather than a strategy. And that mindset can be costly. Now, if you're looking for a financial advisor who doesn't just focus on investments, but also provides comprehensive tax advice, including proactive tax projections, and even has their own tax practice to file returns, then visit thelongterminvestor.com or go to callwithpeter.com and learn more about PlanCorp, which is a true one-stop shop that goes well beyond the basic financial advice and brings your wealth into alignment with your goals and values.

1:52Now, let's grab your latest pay stubs and get started with the basics of a tax projection. So what is a tax projection? At its core, a tax projection is a forward-looking estimate of your tax liability. It takes into account your current income, deductions, credits, and investments, along with any expected changes in the future. Some people will refer to it as a financial crystal ball, which I guess is fine. I mean, it's not perfectly precise, but it's accurate enough to give you a clear sense of what's coming. The process is actually pretty simple for you if you're working with a financial professional.

2:32You're just going to initially gather key pieces of personal financial information, starting with your pay stubs, which show your year-to-date income, your tax withholdings, your contributions to retirement accounts like a 401k or an HSA. And then from there, your professional is going to factor in other sources of income, such as investment dividends, rental income, or social security benefits. And they're also going to look at those deductions like mortgage interest, charitable donations, and healthcare expenses. Next, a financial professional is going to model your tax situation using specialized software.

3:06And the software is going to incorporate federal and state tax laws so that they're applying the appropriate tax brackets, credits, and rules to calculate your projected liability. For example, they might adjust for bonuses, stock options, or any planned large transactions like selling an investment or withdrawing from a retirement account. Now, this step-by-step process isn't just about crunching numbers. It's about creating a clear roadmap because a tax projection lets you see how your actions today, like exercising stock options or doing a partial Roth conversion, will impact your tax bill tomorrow.

3:45And it shows how these decisions could affect your taxable income, potentially pushing you into a different tax bracket or unlocking opportunities for long term savings. And perhaps most importantly, it eliminates surprises. Now, why does this matter? Well, in my opinion, taxes don't exist in a vacuum. Every financial decision you make, whether it's investing in a new asset or withdrawing money in retirement or rebalancing your portfolio, they all have tax consequences. And tax projections allow you to see those consequences before they happen, giving you the power to adjust your strategy and make more informed decisions.

4:28So let me give you a few real-life examples of a tax projection in action. So we'll start with something I see all the time, which is just deciding when to withdraw from retirement accounts. So imagine you're nearing retirement and you have both a traditional IRA and a Roth IRA. You know withdrawals from a traditional IRA are taxed as ordinary income while Roth withdrawals are tax-free. So which account do you tap first? A tax projection can show you the impact of different withdrawal strategies. For instance, if you're in a lower tax bracket early in retirement, it might make sense to draw from your traditional IRA first, delaying those Roth withdrawals until your income and tax bracket rises.

5:13This strategy is commonly known as tax bracket management, and it helps you minimize lifetime taxes and keep more of your hard-earned money. Now let's consider stock options. Let's say you've been awarded incentive stock options, or ISOs, as part of your compensation package, and you're debating whether to exercise them this year or next. A tax projection can help you weigh the impact of this decision because exercising ISOs triggers the alternative minimum tax, or AMT, which operates differently from regular income taxes. By projecting your taxes under both AMT and standard tax rules, you might discover that exercising some options this year and the rest next year reduces your overall tax liability.

6:01Or perhaps you're nearing the end of the year and a tax projection reveals that exercising the options now, when your income is lower, keeps you in a lower tax bracket and avoids a much larger tax bill. Either way, having this information allows you to plan strategically, ensuring that you maximize the value of those options while minimizing taxes. Now let's look at the business owner. Let's suppose you run a successful small business and you're trying to decide whether to accelerate income into this year or defer it into next year. Similarly, you might be wondering if it's worth purchasing new equipment before year end to take advantage of bonus depreciation or waiting until next year to better match future income.

6:45Once again, a tax projection can help you navigate these choices. For instance, accelerating income into this year might make sense if your current tax bracket is lower than what you'd expect next year. Especially if tax laws or your business's growth could push you into a higher bracket. Alternatively, delaying income could help you avoid crossing into a new bracket, potentially saving thousands in taxes. On the expense side of things, a tax projection can show how purchasing equipment or prepaying business expenses now could lower your taxable income enough to avoid phase-outs on deductions or credits.

7:30And conversely, deferring expenses until next year might align better with a future increase in income, optimizing your overall tax strategy over time. So all of these are just examples of how by running a variety of different scenarios can empower you to make proactive, informed decisions that not just reduce tax liability, but also align your financials with your values and goals. But I want to dig in to one more area a little more broadly, and that's just some of the common tax projection opportunities for do-it-yourself investors. So if you've historically been a do-it-yourself investor, I think that you can recognize that accumulating wealth often feels pretty straightforward.

8:16You save consistently, you invest in low-cost index funds or factor-based funds, and you ride the market's ups and downs trying not to get emotional about what's going on. But when it's time to transition from accumulation to decumulation, things get a little more complex and there aren't articles or podcasts or books that are really going to address your specific situation. Now, decumulation involves not only spending your savings, but also managing the tax implication of drawing from various accounts. So without proper planning, it is very easy to make costly mistakes. And I think that tax projections are one of the most powerful tools to help minimize those mistakes.

9:03And so I thought I would just lay out a couple of the key opportunities for where tax projections can provide clarity and confidence. The first and the most common that I see among people who are nearing or recently retired is Roth conversions. Roth conversions are a classic example of a strategy that's easy to understand, end, but tricky to execute correctly. If you are a do-it-yourself investor nearing or in retirement, you might have accumulated significant savings in a tax-deferred account like a 401k or a traditional IRA. The tax projection can show how converting some of that money into a Roth IRA could save you significant taxes in the long run.

9:47For instance, if you're in a lower tax bracket early in retirement before required minimum distributions kick in. It might make sense to convert just enough each year to, quote, fill up your current tax bracket. But without a tax projection, you might convert too much and inadvertently bump yourself into a higher bracket paying unnecessary taxes or even tripping over some of the IRMA rules. Another area that is particularly relevant is social security taxation. Now, many do-it-yourself investors don't realize that up to 85 % of their social security benefits could be taxable depending on their other sources of income.

10:28A tax projection can help you see how your withdrawals, your pensions, your investment income will interact with your social security, allowing you to adjust your strategy. For instance, you might choose to withdraw more from a Roth IRA, which doesn't count as taxable income to keep your social security taxation lower. Now, this level of optimization is nearly impossible to achieve without running the numbers in advance. Another area that's somewhat similar is managing capital gains. I mean, let's say you've done a great job accumulating wealth and now have a significant amount of investments in a taxable brokerage account.

11:07Managing capital gains can be a challenge. Do you sell appreciated assets to fund your retirement or hold them to avoid triggering taxes. A tax projection helps you evaluate the trade-offs. For instance, you might discover that harvesting gains in a year when your income is lower allows you to take advantage of 0 % long-term capital gains tax brackets, or if you just had a bad year in the market, you could harvest losses to offset future gains, reducing your overall tax liability. Another thing that many do-it-yourself investors don't think much about is RMDs until they're about to turn 73. And granted, the age has been moving upwards, so it used to be until 70 and a half.

11:52But right now, the number 73 in the IRS forces you to start withdrawing from your tax-deferred accounts. But by then, your options are pretty limited. A tax projection, though, can help you plan years in advance, potentially avoiding a situation where RMDs push you into a higher tax bracket. For example, it might make sense to start withdrawing from your IRA earlier or combine those withdrawals with Roth conversions to smooth out your taxable income over time. A few more things to think about. If you are charitably inclined, tax projections can make you're giving far more efficient. Instead of writing a check, you might discover that donating appreciated securities from a taxable account gives you a larger tax benefit by avoiding capital gains taxes.

12:42Or if you're over 70 and a half, a qualified charitable distribution or a QCD directly from your IRA can satisfy part of your RMD while reducing your taxable income. And finally, I think one of the most important opportunities in decumulation is determining the order of withdrawals. Should you tap your taxable accounts first, your tax-deferred accounts, or your Roth accounts? The answer depends on your unique situation, but tax projections can reveal the optimal strategy. For example, withdrawing from taxable accounts first might keep your tax bracket low and allow your tax-advantaged accounts to continue compounding.

13:27On the other hand, withdrawing from tax-deferred accounts earlier could minimize the impact of future RMDs. So as you can see, tax projections unlock a range of opportunities to optimize your financial plan, especially in retirement, where every decision carries added complexity. But here's the thing. Like I said before, these opportunities don't present themselves in a vacuum. Your financial picture is constantly changing, and so are the tax laws that shape it. And that's why tax projections shouldn't be a one-and-done exercise. Instead, they are a year-round tool that helps you stay ahead, adapt to changes, and avoid costly surprises.

14:14I mean, just think of the many life events that can impact your tax situation. Whether it's starting a new job, retiring, receiving a windfall, selling a business, getting a new equity grant. Each of these events carry financial consequences that just ripple across all of your income, your deductions, your tax bracket. And then financial markets themselves, they also play a role in tax planning. Because if the markets take a dip, it might be a great time to implement tax loss harvesting or to convert a portion of your IRA to a Roth IRA while your account values are lower, locking in that future tax-free growth.

14:53These opportunities, they require timely action, which honestly, it's just not possible to do only once a year with your accountant. And I think the other piece of this is that tax laws are changing frequently. And so if you're working with someone, it is critical that they have the infrastructure to stay informed to help you minimize that tax liability throughout the year. Because ultimately, a year-round tax planning approach isn't just about saving money. It's about peace of mind. And knowing that you've reviewed your financial picture regularly, considered all potential opportunities, and taken steps to minimize surprises allows you to feel confident in your financial decisions.

15:35Now, at the beginning of this episode, I had sort of pointed out how most financial mistakes don't come from one big misstep, but really they just come from failing to see the bigger picture. And I keep emphasizing this point that accumulating wealth is relatively straightforward. But decumulation, the process of drawing down your assets strategically, that's really where things get tricky. And I think that's why tools like tax projections are so valuable. They give you the clarity to avoid costly mistakes, as well as the insight to make informed decisions and the confidence to move forward towards your goals.

16:14If you are ready to stop guessing and start planning, believe me when I say PlanCorp can help. We go beyond basic financial advice to offer comprehensive tax planning, proactive tax projections, and even tax return preparation. A true one-stop shop designed to help you make better choices with your money while aligning your wealth with your values and goals. So take a moment, go to callwithpeter.com and learn more about how we help individuals like you feel confident about their financial futures. Thanks, as always, for listening and to Long-Term Investing.

17:17This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of PlanCorp and BrightPlan may maintain positions in the securities discussed in this podcast.