Financial Planning and the New Tax Code

As Benjamin Franklin once said - nothing is certain in life except for death and taxes. Congress implemented the first income tax in 1861, and taxation has remained a constant in the lives of Americans throughout history.

Although taxation laws change frequently, taxes will always play a large role in your financial life. That’s why it’s important that your financial plan is built with them in mind. We can never fully negate the impact that taxes have on your money, but being cognizant of how they affect you can help you to learn to work with them rather than against them.

Understanding Your Income Tax and the New Tax Code

When you think about taxes, the first thing that comes to mind is typically your income tax. We all remember our first job, and we also remember the uncomfortable shock when we realized just how much income tax was being taken out of our first paycheck! Luckily, under the new tax code implemented in 2018, approximately 80% of people will see a total reduction in their total income tax next filing season. But what does that mean? And how do you know what you owe?

The tax code was written with the intention of simplifying taxes across the board for individual filers and businesses alike. Of course, nothing is ever truly simple when it comes to taxes. Nevertheless, the new tax code has increased the standard deduction for both single and married filers. This makes taking itemized deductions less attractive and, in some cases, decreases the total amount of income taxes that are taken out of each paycheck. Additionally, the tax brackets have changed with the new tax code - and the total amount owed for each bracket has been slightly reduced.
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​Taxes and Your Investments

In addition to impacting your income, taxes impact your investment portfolio, as well. The first (and most obvious) way that taxes impact your investments is by reducing the total amount of money you have to invest at any given time as a result of income taxes. However, you can counteract this by investing in a pre-tax savings account, such as a 401(k) through your employer.

Keep in mind, even if you are investing with pre-tax funds, you aren’t completely avoiding taxes on your investments and returns. Tax-deferred accounts, such as a 401(k), Health Savings Account, or other workplace retirement plan, may not tax the income you use to fund the account - but they do tax funds that are withdrawn from the account. This includes not only the money you’ve invested, but your investment gains, as well.
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Traditional and Roth IRAs

In a 2016 survey, over 43 million American households had an individual retirement account. If this is you, you need to know how taxes impact either your Traditional or Roth IRA - as the rules are different depending on what type of account you have.

Contributions to a Traditional IRA are tax deductible - which lowers the total income tax owed each year. The amount you can deduct is based on your income bracket. However, distributions you take from a Traditional IRA when you retire are taxed.

Roth IRAs are funded with after-tax dollars, and you can’t deduct your contributions on your income taxes the same way you can with Traditional IRA contributions. However, when you go to take distributions from a Roth IRA as a retiree, the distributions aren’t taxed. Keep in mind that eligibility to contribute to a Roth IRA is dependent on your income.
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Planning For Taxes

Taxes serve a purpose in our world, and paying them is our responsibility. However, when you work hard to earn income and save for retirement, you don’t want taxes to negate the efforts you’ve made. Working with a financial planner and accountant team to create a tax-efficient investment strategy and financial plan can help you to uphold your responsibility to pay taxes without overpaying. At Wisely Advised, our team focuses on helping our clients construct a financial plan that prioritizes mitigating the impact that taxes have on your wealth to move you toward your goals - because nobody should be stuck overpaying taxes later due to lack of planning now.

Tony Velasquez is the Founder and Managing Director of Wisely Advised an Illinois Registered Investment Advisor.  Wisely Advised provides comprehensive financial planning and investment advisory services to both individual and business clients.  You can learn more about Tony and his firm here. ​​​