As we put 2020 in the rearview and embarked on the journey of 2021 many people had a lot of questions:

  • Will my kids go back to school/daycare?
  • Am I going to return to the office?
  • Can we take that family trip this year?
  • What other random change will pop up to disrupt my life and occupy the news cycle?

In the midst of this season of incredible change, you may be wondering if anything will remain the same. While there may still be some ambiguity and unanswered questions one thing is certain in 2021 and that is that we will still pay taxes! As March nears and April 15th tax deadline looms, it’s a great time to start thinking about what you can do to help improve your (and your family’s) financial situation for years to come.

The Sequoia Team has been diving deep to look at ways we can help position our clients for success, and that includes efficient tax-planning. To help illustrate some of these ideas, we will look at two Case Studies, examining tax planning opportunities for two different families with very different situations:

The Smiths

  • Situational Information
    • Married couple, each 45 years old
    • Have a marginal tax bracket of 22%
    • They have cash available of $6,000 above their emergency reserve of 3-6 months of expenses
    • Did not contribute to an IRA and do not have an employer qualified plan
    • Expect a tax refund of $1,000
       
  • Recommendations
    • The Smith family is eligible to make IRA contributions of up to $6,000 per person. If they were to use the $6,000 of available cash for that purpose, it would reduce their tax bill by $6,000 and increase their refund to $2,320.
    • This can benefit their situation in two ways:
      • It allows them to put $6,000 into a tax deferred account, that with no further contributions could grow to upwards of $19,000 by the time they are 65 (assuming 6% growth).
      • Their tax refund is increased by $1,320 allowing them to further replenish excess cash that was used to fund the IRA, making the total cost of saving $6,000 only $4,680.

 

The Roberts

  • Situational Information
    • Married couple, each 55 years old
    • Marginal tax bracket of 24%
    • Have $10,000 cash available above their emergency reserve of 3-6 months of expenses
    • Maxed out their qualified plans and cannot make deductible IRA contributions
    • Qualify for a High Deductible Health Plan and have a Health Savings Account (HSA) that received total contributions of $2,100
    • Planning on owing $5,000 in taxes
       
  • Recommendations
    • The Roberts family can contribute an additional $6,000 to their HSA (reaching the annual 55 and over family maximum of $8,100).
    • This would benefit them in two ways:
      • By socking away an additional $6,000 into their HSA that money is projected to be worth almost $11,000 when they reach age 65 (assuming a 6% growth rate). These funds will then be available tax-free to use towards medical costs in retirement.
      • The other benefit of this contribution is that their tax liability was lowered by $1,440 reducing their overall tax bill to $3,560.

 

While each of these strategies requires the families to use some of their current savings it ultimately helps keep more money in their pockets and sends less into the pockets of the IRS. Tax planning is less about paying no taxes (which is often not realistic) but is more about using the tools at your disposal to reduce your taxable income, increase your savings/preparedness, and minimize your tax obligation. Our team looks at a variety of metrics and will happily explore your options with you.

As tax season approaches whether you believe you will have a tax refund, or tax bill reach out to your financial advisor or CPA to see if there are planning techniques specific to your situation that could allow you to keep more of what’s yours.