First the headline… a true story out of the Great State of Texas. Tax diversification is quite important, and how people buy what they buy can have a dramatic impact on wealth creation.
So, how did saving $5,100 in taxes cost the client $1.25M? Before I begin, it is critically important that the CPA guides this process along with other professionals. In this case, the CPA did not save the taxes, it was the client’s Third Party Administrator that made this huge planning blunder. The tax preparer almost choked on their lunch when they discovered this problem. The case is brought forth so you are aware of poor planning ramifications. Additionally, there may be significant complexity beyond the simplicity outlined for your benefit. The reality is that when good planning and investment management is combined, greater wealth can be created.
Case Facts: Taxpayer purchases a high appreciation asset which taxpayer will write a $17,000 check. This investment has no debt incumbrances or capital call issues. The client is age 45. The client reasonably believed that the investment could double within two years. After two years, the investment was sold for over $130,000. Assuming the proceeds are reinvested into an investment that yields a 10 percent annual rate of return , the following question is presented.
Question: Which account should that check be written out of?
Email me your response, and I will follow up next month with the answer. Please explain the tax consequence and the amount that the taxpayer would have after the initial transaction, and how much they would have over their lifetime. Assume the client is 45 and will live to age 85. First winner gets a $75 gift certificate for a meal for two at Oscars. The next five runners up who are correct get a Starbucks card.
Investment Questions
Have you reviewed your risk tolerance?
Do you know how much can your investment rise and fall with a high confidence level?
If yes, now express that percentage in terms of dollars.
Have you run a projection on how much you will be required to take in retirement at the highest tax levels?
Do you have assets that provide for a tax free income stream?
Have you considered how much you need to retire and pay increasing taxes and healthcare costs?
Have you determined how you can pay for some of those expenses tax free?
If the answer is no to three or more, it is time for a checkup.
Leonard C. Wright, CPA/PFS, CFP, CLU, ChFC
Having fun one client at a time.
AICPA Money Doctor
Financial Fridays KLAV 1230AM 3 PM.