The Importance of Tax Planning, Current Policy and How It Might Change

There are many facets to guiding clients to achieve financial success. The aspect of financial planning that can have one of the most oversized effects on client outcomes is the impact of taxes and the lack of proper tax planning. Taxes drive many of the financial decisions we make in our day to day lives. Tax planning is critical to avoid making major mistakes which can derail even the best laid plans.

Tax planning is not the same as minimizing one’s tax liability at tax time. Tax planning is a forward-looking, proactive approach to maximizing wealth over one’s lifetime. Tax planning is understanding the tax ramifications from each investment decision and selecting the most appropriate course of action.

Examples of tax planning include:

  • updating income tax withholding elections so as not to underpay taxes throughout the year
  • allocating to a tax efficient investment portfolio versus reaching for higher yields
  • maximizing wealth in retirement by optimizing a withdrawal strategy
  • tax-efficient means of transferring assets to heirs
  • understanding the impact of deferring income into a 401(k) on a pre-tax or Roth basis now and into the future
  • leveraging investment portfolio assets for a large capital outlay instead of selling them outright
  • analyzing how changing political legislation will impact rules governing retirement accounts and tax brackets
  • opting to pay more taxes now at a lower rate in anticipation of higher future tax rates

Most of the current policies in place today have been around for years, which has enabled our firm to do prudent planning for our clients. However, the Biden administration has proposed tax policies for consideration by the U.S. Congress which may have a significant negative impact on our client’s wealth while living and when they intend to transfer it on to the next generation. President Biden has proposed that marginal tax rates should be raised for households exceeding $400,000 of income, long term capital gains rates should be taxed at the highest ordinary income rate for income in excess of $1,000,000 (applicable to anyone selling a major asset like a small business), and step-up in cost basis of appreciated assets at death should be eliminated. More daunting changes include reducing the unified tax credit $11.7 million per individual to a level at or below prior to the Tax Cut and Jobs Act of 2017.1

As a result of these proposed changes, some clients may wish to accelerate income in 2021 before tax rates go up by considering partial Roth conversions and harvesting capital gains to pay lower taxes now.

MFA Wealth works with its clients and their tax advisors to develop comprehensive tax planning strategies to grow and preserve as much wealth as possible. If you are a new or existing client and wish to schedule a tax planning meeting, please click here to complete the scheduling form.

1 Rubin, Richard, and Rachel Louise Ensign. “Biden’s Capital-Gains Tax Proposal Puts Estate Planners to Work.” The Wall Street Journal, Dow Jones & Company, 8 June 2021,