CAVEAT EMPTOR: TAX PLANNING IN THE NEW NORMAL

Charlie Jordan for Brightworth writes: During the height of the 2008/2009 financial crisis, Rahm Emanuel, then Chief of Staff to President-elect Barack Obama, made the infamous statement “You never want to let a serious crisis go to waste.” In all fairness to now Mayor Emanuel, his point was that crises create the opportunity and the catalyst for action that may or may not have been possible, or even appropriate, beforehand.

One recent “disaster” was averted on January 2nd of this year when President Obama signed The American Taxpayer Relief Act of 2012, avoiding the dreaded “fiscal cliff”. For high-income taxpayers, the bill: increased the top marginal rate to 39.6%, increased long-term capital gain rates to 20%, put a cap on itemized deductions and phasedout personal exemptions. When you combine these increases with the new Medicare surtax provisions coming into effect, high-income individuals now have an income tax problem greater than before. They may feel like it’s their “crisis”.

Well to solve this crisis, here come the bright flyers, magazine ads, promotional seminars, and internet advertising for the tax product dujour. Yet keep in mind the action you should take isn’t to suddenly change your whole financial strategy, or put all of your money into one special product. It’s to do more proactive, holistic tax planning. This is our new normal.

Here are three key considerations when evaluating strategies to address higher taxes.

Focus on your goals first

With any tax planning strategy, first take your financial goals into consideration. For many people, their main goal isn’t to save every penny in tax that they can. Goals tend to be larger and more meaningful; retiring at 55, putting my kids through college and coming out debt-free, etc. Keep in mind there are numerous financial products that shield assets from taxes, such as non-qualified annuities and permanent life insurance. They can serve as suitable and appropriate options for lowering your income tax bill, but may have other potentially negative side effects. Do they fit in with the rest of your coordinated plan? How are they going to help you meet your objectives? Focus on your goals first and then align the strategies and products that will move you closer to accomplishing those goals.

Ask questions and understand the strategy

There are many highly-complex strategies and products sold that are often misunderstood by both the investor and the advisor. Your advisor should be able to clearly explain why a particular strategy is being recommended and how it ties into the rest of your financial plan. Do not be afraid to ask questions and use your intuition. If something makes you uneasy, either seek to better understand or do not move forward. And of course, especially when evaluating a financial product, if it sounds too good to be true, it probably is.

Work with an objective and coordinated team of trusted advisors

Finally, make sure your advisor, CPA, attorney and insurance professional are all on the same page. Having two or more objective sets of eyes on a potential strategy will reduce the likelihood of a financial pitfall. The most effective teams are ones that have earned the trust of their clients.

Innovation is not dead in the financial world and is a good thing for investors. As tax laws continue to change, there will be creative and novel approaches to mitigating the impact. With that being said, there are potholes and traps along the way that need to be avoided. Investors should surround themselves with objective and wise counsel that they trust and seek to understand how any given strategy will help get them from where they are today to where they want to be in the future.