Insider | July 14, 2016

Don’t Sleep on Tax Management: Talk to Your Advisor this Summer

by  Gerald A. Polcari, GW & Wade Principal & Counselor

temp.jpg“Tax management in July? Sounds like fun!” said no one…EVER!

But that doesn’t mean a mid-year tax review is a bad idea.

In fact, the key to effective tax planning is to anticipate. Lots of things happen during the course of the year that can impact your taxes: a new job, a new home, dozens of seemingly smaller financial events. If you postpone tax conversations until January, the best your advisor can do is mop up after the fact.

Don’t wait to discover unpleasant surprises come April. There may be things you can do—right now—to offset your tax obligation, or to optimize your financial plan in general.

At GW & Wade, we engage in pro-active tax planning for our clients throughout the year. If you’re interested, we’d love to help you too:

free tax planning consultation

Meanwhile, this post highlights a few of the tax management scenarios we see every day. If you’re a:

• Retiree
• Corporate Executive
• Startup Executive
• Individual Raising a Young Family

…scroll down to see how proactive measures relate to your tax strategy. I hope these examples will encourage you to communicate with your GW & Wade Counselor or your own financial advisor throughout the year—whether you’re focused on building wealth, planning for retirement, or piloting the next big tech startup.

Tax Management for Retirees

Let’s say you’re a retiree with a 401(k), IRA, maybe a pension. Tax planning strategies allow you to access and maximize the after-tax money you have in these types of accounts. But first, a bit of context:

Leading up to retirement, you’re allowed to accumulate money in retirement accounts—often on a pre-tax basis—as long as you are working. Once you turn 70.5, assuming you have retired, the tax law requires you to start taking minimum distributions, which are a function of 1.) the size of the accounts, and 2.) your life expectancy. The minimum distributions are subject to ordinary income taxes when the money comes out.

Really? I Should Consider Taking Money Out of My Retirement Accounts Before I’m Required To?

Perhaps. If you’re older than 59.5 and younger than 70.5, you are allowed to take money out of retirement accounts without penalty even though you’re not obligated to take distributions. This can be a smart tax move for people who have built a good-sized nest egg, and don’t want to pay more income taxes later, on a larger retirement account balance that will obligate them to take a higher required minimum distribution in the future.

For example, a retired client who is 64 years old with limited assets outside of retirement accounts, who is no longer working or old enough to collect full Social Security benefits, may be able to take $50-$75K from a retirement account and only pay an effective 10% income tax on the amount distributed. What this strategy does is to help provide a reasonable cash flow for the client—with the least amount of tax burden—during the intervening years between retirement and the required minimum distributions. This strategy of course depends on the other elements of the client’s investment and tax profile, which a good advisor can help you evaluate.

Tax Management for Corporate Executives

Most corporate executives have a multifaceted compensation structure; the different elements (stock options, restricted stock grants, deferred compensation) add complexity to tax planning—especially if you’ve recently accepted a new role or a new benefits package. Even when nothing has been materially altered by your employer, your tax implications can still change from year to year…

Let’s say, for example, you were granted restricted stock units that are scheduled to cliff vest in four years. When the restricted stock was granted, the grant had no immediate value or tax implication as it was unvested. But in year four, the value of the vested stock will be deemed ordinary income subject to ordinary income tax. Depending on the value, this type of event can trigger significant tax consequences that you may not be aware of until the following April when you file your tax returns.

If you’re approaching a major income event like this, you’ll want to evaluate tax mitigating strategies early. Those who are charitably inclined might consider increasing their charitable contributions, as a way to secure a larger deduction during a high income year. You may also want to explore opportunities to defer some of your income. (Does your company offer a deferred compensation plan?) It’s always smart to speak to your financial advisor about different strategies for pushing income into the future, or accelerating deductions into the current year—as well as the tradeoffs involved in either strategy.

Beyond tax planning, understanding the elements of your compensation—including whether the value of your vested stock has gone up or down significantly—underscores a larger point: financial advisors are most valuable when you keep them abreast of what’s happening in your life.

Tax Management for Startup Executives

Early employees of technology startups are often awarded grants of restricted stock or stock options. These are fairly common types of compensation in the tech industry, and they’re fraught with tax considerations. For example, there’s a whole alternative tax calculation, called the Alternative Minimum Tax (AMT) which requires taxpayers to calculate their tax liability with a different set of rules on what’s taxable and what’s deductible. Our tax system imposes whatever tax is greater – i.e. the regular tax or the Alternative Minimum tax.

Tech founders and startup employees need to get out in front of next year’s taxes, and consult with someone who understands the complex tax rules. (or at least most of the rules. The U.S. tax code and the regulations are something like 75 thousand pages long.)

One of my clients founded a startup in the tech space, and began talking to us early-on about his vision for the company. We looked at alternatives he had to manage his stock options—for example, to buy the stock when the value of the company was pennies a share, even though we weren’t sure whether it would ever be worth anything. On the upside, if the company emerged successful, he would cut his effective tax rate by converting what would otherwise have been ordinary taxable income to capital gain income. Of course, client tax situations always vary. Regardless of the outcome in situations like this, the take-away is to be sure to address these issues pro-actively.

Tax Management for Young Families

Younger couples have significant demands on their cash. They may be preparing to buy a house, supporting kids, paying down student loans... The last thing they need is a giant, surprise tax bill.

For these families, effective tax planning is largely about setting (and adjusting) withholdings at a rate that is effective. For example, many people never bother to change their tax withholding after getting married. Or they’re awarded a big bonus, but neglect to consider that they may have a much larger residual tax liability since their withholding not be sufficient to pay the tax that is due.

Again, these conversations are more than just tax planning. They’re about building your wealth with small, strategic moves (e.g. taking full advantage of an employer’s 401(k) match and corporate benefits, or leveraging a dependent care account which allows people to put away up to $5K pre-tax in an account for childcare expenses).

General Tax Management Tips and Triggers

Whatever your age or financial goals, here are few final notes on tax planning throughout the year:

Practice good recordkeeping.

Among clients of all stripes, we’re seeing a big increase in audits. Many of the notices are computer generated automatic letters from the IRS based on proportions reported on the tax return (e.g. how large are your charitable deductions in proportion to your income). Taxpayers are being asked to prove the deductions that they may have claimed as part of their tax return. This doesn’t necessarily mean more people are gaming the system, but it does underscore the importance of thorough recordkeeping.
If you ever need to prove your deductions, recordkeeping is essential—especially if you’re self-employed. A good financial advisor will walk you through rules, review the categories that are deductible, and give you spreadsheets to help track expenses.

Always call your financial advisor first second.

It’s not uncommon to see clients who have had no financial help during the course of a divorce settlement. The tax and financial implications that result can be significant. For instance, negotiating for ongoing support for a spouse and children can be taxable to the recipient spouse if it is structured as alimony. But if the same support were structured as child support, the recipient spouse would have $0 income tax liability on the payments received.

Bottom line: when life events happen—good or bad—your advisor needs to know early – and before the end of the calendar year. After year-end, the planning opportunities will have passed. So when something momentous happens, sure, call a friend or loved one first, then call your advisor second. If you get a big bonus, if you receive a stock option or restricted stock grant, if you’re getting married or divorced: I want to be that go-to person.

Have you modeled your income taxes for 2016 yet? Do you know your projected tax obligation? Could you be taking actions now to mitigate the impact in April?

Contact our team (this summer!) for a tax management consultation.


The information provided above is general in nature and is not intended to represent specific investment or professional advice.  No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.  Please see the “Contact Us” section of our website,, for information on contacting GW & Wade. 


Gerald A. Polcari

GW & Wade Principal & Counselor


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