The official closing of the 2015 tax season passed over a month ago. Its passing provides a lot of items to reflect on. This tax season taught me more than any, that our proactive approach is essential to client tax optimization. As CPAs we serve our clients the best when we know about business or personal financial decisions before they happen. A big part of the strategy is why we recommend having a strong team. This can include an attorney, insurance agent, loan officer, financial planner, and of course the CPA. The focus on this team is to promote collaboration between all the members. Collaboration allows us to plan and optimize our clients’ tax situations. Recently, collaboration with a financial planner reminded me of how important the team is and I wanted to share the experience.
Imagine a business owner in the start up phase of a business. They are spending a lot of money to make their business grow and not seeing a lot of return. Like most owners in the start up phase, they want to maximize the tax benefit of the money they funded the business with. Assume this business owner is married and they are a dual income household. Prior to starting the business they are in the 25-28% Federal tax bracket. Due to the start up and opening of their business, they generated losses that drove their taxable income into the 15% tax bracket. In addition to taxable compensation the couple also has a brokerage account with various stock investments.
Why is this important?
At the 15% tax bracket, qualified dividends and long term capital gains (for Federal tax purposes) are taxed at 0%. That’s right, 0%! The business owner has stock that they have held for a significant period of time (long term treatment is a year or more). Their financial planner has wanted to get them into another strategy, but did want them to take the significant tax hit. These initial years of the business, until it turns profitable, are ideal times to make those strategy changes. The financial planner can sell the investments and the taxpayer reports the long term capital gain and pays 0% tax at the Federal level. Everyone is happy. While state taxes will still be due; with NC taxes being reduced to 5.75% for 2015 I believe this is a good trade off. If those same stocks were sold when the couple was in the 25-28% bracket they would have paid the additional 15% for Federal taxes.
While not every client is starting a business, or has significant capital gains they would like to capitalize on, or could benefit from this strategy, this is a good example of why it is important to have a strong team that collaborates to get you the best results possible. We recommend you consult all members of your team about any strategy that you take.