As you work toward achieving your goals, you will need to make moves that contain financial, tax and legal elements. So, you may want to get some help – from more than one source.
Specifically, you might want to put together a team composed of your financial adviser, your CPA or other tax professional, and your attorney. Together, this team can help you with many types of financial/tax/legal connections.
For starters, you may decide, possibly upon the recommendation of your financial adviser, to sell some investments and use the proceeds to buy others that may now be more appropriate for your needs.
If you sell some investments you’ve held for a year or less and realize a capital gain on the sale, the gain generally will be considered short-term and be taxed at your ordinary income tax rate. But if you’ve held the investments for more than a year before selling, your gain will likely be considered long-term and taxed at the lower, long-term capital gains rate, which can be 0 percent, 15 percent, 20 percent or a combination of those rates.
On the other hand, if you sell an investment and realize a capital loss, you may be able to apply the loss to offset gains realized by selling other, more profitable investments and also potentially offset some of your ordinary income.
So, as you can see, the questions potentially raised by investment sales – “Should I sell?” “If so, when?” “If I take some losses, how much will they benefit me at tax time?” – may also be of importance to your tax adviser, who will need to account for sales in your overall tax picture. As such, it’s a good idea for your tax and financial advisers to communicate about any investment sales you make.
Your tax and financial advisers also may want to be in touch on other issues, such as your contributions to a retirement plan. For example, if you are self-employed or own a small business, and you contribute to a SEP-IRA – which is funded with pretax dollars, so the more you contribute, the lower your taxable income – your financial adviser can report to your tax adviser (with your permission) how much you’ve contributed at given points in a year, and your tax adviser can then let you know how much more you might need to add to move into a lower tax bracket, or at least avoid being bumped up to a higher one. Your financial adviser will be the one to recommend the investments you use to fund your SEP-IRA.
Your financial adviser can also help you choose the investment or insurance vehicles that can fund an estate-planning arrangement, such as an irrevocable living trust. But to establish that trust in the first place, and to make sure it conforms to all applicable laws, you will want to work with an attorney experienced in planning estates.
Your tax professional may also need to be brought in. Again, communication between your various advisers is essential.
These are but a few of the instances in which your financial, tax and legal professionals should talk to each other.
So, do what you can to open these lines of communication – because you’ll be one who ultimately benefits from this teamwork.