276 | Why Tax Planning Beats Tax Prep: How to Take a Tax-Forward Approach to Your Money

[INTRODUCTION]

[00:00:00] Hilary Hendershott: Well, hey there, Money Lover. I’m Hilary Hendershott, the host of this show and the founder of Hendershott Wealth Management. I’m proud to say at Hendershott Wealth Management, our team has grown. It’s lovely. It’s amazing. And so, we’re changing things for the better around here at Love, your Money^®. You’ll be hearing from other advisors and people on my team, people with money expertise whose voices you should know. I’m so excited for you to get to know all of us at Hendershott Wealth.

Today, you’ll hear from Jen Rupp. Jen is–everyone on my team is a CERTIFIED FINANCIAL PLANNER^® professional. She’s also our Director of Financial Planning and a Senior Advisor on the team. She’s the yin to my yang and the right to my left. I can’t wait for you to get to know her more. And she’ll be joined by Alyssa Hause, who is also a Senior Advisor on my team. She’s been with my firm since the very beginning. And for those of you who heard me interview her on this show a handful of episodes ago, you know that she is also one of my besties and my baby sister. She’s no longer a baby, though. We’re both in our mid-forties. So, enjoy this episode of Love, your Money^® with Jen and Alyssa.

[EPISODE]

[00:01:10] Jen Rupp: Welcome back to Love, your Money^®. I’m Jen, the Director of Financial Planning and Senior Financial Advisor at Hendershott Wealth Management. And I’m here with my co-host, Alyssa, who is a lead financial advisor here at HWM. And today we’re diving into a topic that a lot of people don’t think about until it’s too late, and that is taxes.

[00:01:30] Alyssa Hause: That’s right. Most people see taxes as a once-a-year headache but the truth is tax season isn’t really a season. If you want to be smart about your money, taxes need to be a part of your financial planning all year long. But that doesn’t have to be as painful as you think.

[00:01:46] Jen Rupp: Exactly. Too often people focus only on tax preparation, so the filing of their return, seeing what they owe, and then moving on. But if you take a tax-forward approach, meaning you plan ahead with tax strategy, you can minimize your tax bill and maximize your wealth.

[00:02:03] Alyssa Hause: So today we’re going to cover the difference between tax planning and tax preparation, how to get organized to make tax season easy, and why working with financial professionals who understand and have education in taxes makes all the difference.

[00:02:20] Jen Rupp: Great. So, let’s start with this. What is the key difference between tax planning and tax preparation?

[00:02:26] Alyssa Hause: So, tax planning is forward-looking while tax preparation is backward-looking, looking at last year. Tax prep is about gathering documents; filing your return. But once that calendar year flips, January 1st comes around, your tax fate for the previous year is already sealed. There’s very little you can do at that point to change your tax outcomes.

[00:02:47] Jen Rupp: Right. And tax planning, on the other hand, is about making proactive decisions throughout the year to legally minimize what you owe. It’s looking ahead, choosing the right investments, structuring your income efficiently, and taking advantage of deductions and credits before tax season hits.

[00:03:05] Alyssa Hause: I love that you said legally minimize because, obviously, we’re encouraging people to minimize their tax bill but within the constraints of the tax system that we have. And that’s why working with professionals who collaborate on your tax planning can be a game changer. At Hendershott Wealth Management, we don’t just react to tax bills, but we help our clients plan ahead to keep more of their wealth.

[00:03:30] Jen Rupp: Yes, we do. So, a few examples of what that looks like could be making sure our clients are contributing the maximum amounts to their retirement accounts and health saving accounts. It’s in making recommendations on the timing of earned income or the sale of an investment. For some of our clients making estimated tax payments, we will send dividend and interest information from their taxable account to their tax preparer each quarter, so their estimated tax payments are reflective of actual taxable income.

For some clients who take required minimum distributions from their IRAs or for other clients who are over 70.5 and might be charitably inclined, we might recommend that they donate directly from their IRA to a charity, and that’s called a QCD or qualified charitable distribution. We have some clients who have appreciated assets, so maybe they inherited a stock and it’s grown and grown and grown or they have employer stock that has grown significantly. For those clients who don’t want to pay the taxes on it by selling it, they can donate the appreciated assets to charities. And so, we recommend a donor-advised fund for that. The list goes on and on.

[00:04:48] Alyssa Hause: And on.

[00:04:49] Jen Rupp: And on.

[00:04:50] Alyssa Hause: At HWM, we’ve already begun tax strategy for 2025 for many of our clients. The episode will go live in March, which is, believe it or not, not too early to be thinking about changes in income, money movements, and tax minimization for 2025, a topic you’re going to hear a lot more about in the next few episodes of Love, your Money^®. Hilary is going to have a great episode coming up about avoiding capital gains in 2025 and what it means to adopt an ultra-tax-efficient investment strategy. So, be looking for that.

[00:05:23] Jen Rupp: Alright. Let’s talk about tax season itself. If people find it stressful, it’s usually for one of two reasons. Either they don’t know what they need to prepare or they haven’t prioritized tax planning throughout the year. So, Alyssa, tell our listeners how they can fix that.

[00:05:40] Alyssa Hause: That’s a great question, Jen. The first step is to work from a tax organizer or a checklist. A good CPA or EA, enrolled agent, will provide one for you as their client. But even before that, you should have your own list based on your personal situation and that could be a category for income-related items like W-2s, 1099s on investment income, rental income, other sources of income your family may have. Another category would be for deduction-related items like retirement account contributions. You have to communicate that to your tax preparer, mortgage interest that you’ve paid, charitable donations, some of those things that Jen was referring to like a donor-advised fund.

A category also for tax credit-related items, you might have a student in college and have education expenses that you could be seeing a tax credit for, a child care cost if you have young children, energy-efficient home improvements or electric vehicle purchases, things of that nature. And then there are some documents that may not fall squarely into one of those categories but are needed for filing your tax return, things like business income and expenses, stock sales, real estate transactions, anything that impacts your taxes. Personally, my tax preparer sends me an organizer, a very detailed organizer. And I review that checklist twice. So, when I’m putting everything together, he’s telling me what I had from the previous year to prepare.

And then when he sends me back my tax return before it’s filed, I go ahead and double check that whole organizer again and make sure I didn’t miss anything, he didn’t miss anything, and I know that I am not going to have to make any amendments to that return, which is a big goal of mine. Jen, how do you look at your checklists?

[00:07:31] Jen Rupp: Well, I am not like most people and I filed my taxes already. I filed them before they were even accepted in my state of Indiana this year. I filed them January 18th, I think, something like that. But I started looking at what my taxes were going to be back in October of last year. So, in the beginning of the year, I kind of projected what I thought our income was going to be and adjusted my withholdings based on that. And then in October, I looked at it of, okay, this is about what we’ve had and am I going to have enough withheld for this year so that I can make adjustments before the end of the year? Because I hate owing taxes. I don’t like a big tax surprise. And I also don’t want to give the government too much of my money ahead of time. I don’t want to give them an interest-free loan throughout the year.

So, I’m very specific on withholdings throughout the year. And then–I file my own taxes, if that wasn’t already apparent–so, I will look at all of the documents that I had to gather last year and make sure that I have all of those. So, I’m making my own list and I’m checking it twice, making sure I don’t forget anything. I’m very tax aware. I’m in this industry, so I’m very aware of all of the things that are needed but it’s looking at anything that might have changed in our income situation this year. Were there any big purchases that we made that should deduct sales tax this year? There’s a lot of different things you can–just think through what happened last year as you’re preparing for this year’s taxes. Is there anything that has changed that might affect any of those categories that you just listed?

And like you said, a good tax organizer is going to ask you a lot of those questions, but if you’re doing them yourself, you may not have that available to you. So, you absolutely need a checklist and you absolutely need a system for tracking it so that you’re not searching through piles of paperwork or sifting through emails at the last minute. So, if you are collecting everything through paper throughout the year, maybe you put together a digital system where you’re scanning those in throughout the year. Maybe you’re downloading your PDF of your 1099s when they’re available and putting them in a folder. It’s about being organized throughout the year so that it’s not so stressful at tax time.

[00:10:12] Alyssa Hause: And I like what you said about not loaning the government money. I don’t think it used to be such a big deal but now that you can earn 4%, 4.5% in a high-yield savings account, it is actually quite a big deal. You add up that interest that you lost or had foregone because you loaned your money to the government, right, through withholdings. And so, once you have that checklist, Jen, what should you do?

[00:11:28] Jen Rupp: So, when we work with clients, part of getting them set up includes creating a Box.com account and walking them through the upload process. It’s a little bit of an upfront effort but is absolutely worth it for the ease of organization in the future. Okay. Next, let’s talk about something most people don’t realize, and that is that not all financial advisors understand taxes.

[00:11:52] Alyssa Hause: Yeah, that’s right. And that is a problem because tax planning is a massive part of building wealth. At Hendershott Wealth Management, we make sure our clients aren’t caught off guard by tax bills and proactively work to legally reduce the tax they owe. We help them make sure that they are saving for taxes throughout the year so there are no surprises, timing income and deductions strategically to reduce taxable income, and implementing strategies like tax loss harvesting to minimize capital gains and some other actions that Jen mentioned earlier.

[00:12:26] Jen Rupp: And I would say the key here really is collaboration. A good financial advisor should be working closely with your CPA to make sure that your investment and your tax strategies align.

[00:13:21] Alyssa Hause: At HWM, we’re just one part of our client’s financial team. We collaborate not only with our client’s tax preparers but also for our business owner clients with their bookkeepers and payroll representatives. This partnership accelerates wealth accumulation for our clients because we can strategize and avoid problems the other party might not even be aware of. We find some tax professionals are really surprised by our open communication and our collaboration, but it absolutely leads to better outcomes for our clients when we work as a team.

[00:13:53] Jen Rupp: Yeah, I found that–we review tax returns for all of our clients–and the biggest issue or the main point of needing to file amendments is that something wasn’t included in their tax return because their tax preparer wasn’t even aware of it. So, really, the taxpayer is responsible for providing all of the information to their tax preparer and they’re responsible for making sure that everything’s included on the tax return. It’s not necessarily the tax preparer’s responsibility, right? If they don’t know about something that happened, they’re not going to include it on the tax return, or if they don’t have enough details around…for a backdoor Roth.

Say, you put money into an IRA, they get a tax document, a 1099-R, when you convert it to your Roth but if they don’t know that that’s what happened, if they don’t have the narrative behind it, then they’re not going to have it reflected properly on your tax return. And so, that’s a lot of our tax letters that we send to our clients. We communicate that to the client to then communicate to their tax preparer so that the strategies that were implemented actually make it onto the tax return. So, it’s incredibly important.

[00:15:07] Alyssa Hause: We’ve created a proactive approach to communicating to tax advisors what we know about the client has done this year like IRA contributions, Roth IRA contributions, things like that, to help our clients not have to make amendments; not having to change those returns because something was missed. So, proactive communication is a really important system that we’ve put in place at our firm.

[00:15:34] Jen Rupp: Yes. After years and years of experience in reviewing returns and trying to decide, how can we make this easier and better for our clients? I think we have really developed some great systems for that. So, if your advisor is only talking about tax loss harvesting or 401(k) contributions, you are definitely missing out on some powerful strategies. So, we just want to give you a few of the advanced strategies or tactics that can really make a big difference in not only tax savings but also in your wealth accumulation.

So, one of the things is minimizing stock turnover in your taxable accounts–that reduces capital gains tax, strategically timing Roth conversions or real estate sales with large capital gains to avoid Medicare premium increases, keeping receipts from home improvement projects so that when you go to sell your home, you can reduce the amount of capital gains taxes that you owe. We’re maximizing tax-efficient investment strategies like direct indexing. And for some of our clients who are retired and taking funds from their investment accounts, we make strategic recommendations on the timing of and the account or accounts from which they are withdrawing funds.

[00:16:54] Alyssa Hause: Exactly. This is exactly why proactive planning is so important. We may see some significant tax code changes this year due to a new presidential administration and a quick understanding/early adoption of these changes means that you don’t miss out on opportunities to save. There’s going to be some tax-savvy moves to make in the future. You want to make those early.

[00:17:17] Jen Rupp: And that’s where we come in. So, a tax-savvy financial advisor should be working with your tax preparer, not just reacting after the fact.

[00:17:26] Alyssa Hause: Definitely. Alright, well, to wrap up our tax-forward approach to money conversation, I’ll leave you with a quote from Benjamin Franklin, who once said, “Nothing is certain except death and taxes.” And while we cannot predict the future or timing of our demise, we can take control of our taxes.

[00:17:45] Jen Rupp: And as we said throughout, the key is to be proactive. So, get organized, use a tax checklist, digitize your records, and work with professionals who understand tax planning, not just tax prep. And when you do, you’ll minimize your tax bill, reduce your stress, and keep more of your hard-earned money where it belongs…working for you.

[00:18:07] Alyssa Hause: And if you want to work for a team that takes the tax-first approach to wealth building, reach out to us at Hendershott Wealth Management. We love to help you create a tax plan and a financial plan that works for you. So, head to HendershottWealth.com/contact to book a no-obligation call with our team. We can’t wait to help you do more with your money so you can do more of what you want with the people you love.

[00:18:29] Jen Rupp: And if you found today’s episode helpful, be sure to subscribe, leave a review, and share it with someone who could benefit from taking a tax-forward approach to their money. Until next time.

[END]

Disclosure: While we do tax optimization work for our clients, we do not prepare taxes. None of the information or examples we’re discussing today should be considered tax advice and you should always consult with a CPA or enrolled agent to determine the complete tax effect or consequence before implementing tax strategies.