The word “season” often conjures up pleasant or nostalgic feelings: wedding season, back-to-school season, the sixth season of The Sopranos, and of course, Holiday season. But there are others that don’t feel quite so good, like flu season, and nobody’s favorite, tax season. It’s March, and we’re in the thick of tax season again, but this year could be different if, instead of focusing on the negatives, you get busy planning to offset, convert, and even eliminate taxes in future years. This edition of the Chronicle is intended to help you make that happen.
A Time for Looking Forward
Every year, after the indulgences and excess of the Holiday season, tens of millions of Americans make New Year’s resolutions. The New Year is often a time of hope and optimism, as well as reflection, and a natural desire for self-improvement. Psychological, social, and cultural factors drive people to make their resolutions—including the fresh start effect, a natural sense of a clean slate that encourages people to set new goals and break from past destructive habits.
It turns out that the New Year is not the only time folks resolve to change. The hassle and stress of filing—and sometimes paying—taxes can act as a catalyst for financial resolutions during tax season. Wrestling with complex forms, searching for receipts and documents, missed deductions, and unexpected liabilities can reveal costly gaps in your financial affairs.
Doing your taxes isn’t fun for anyone, but the pressure of tax season can inspire a renewed focus on making smarter, more organized financial decisions, and that can lead to greater security, a retirement with no diminution in your lifestyle, and potentially a legacy for your heirs and favorite charities. Let’s not forget the age-old advice: it’s not what you make that matters, it’s what you keep.
The Short-Lived Fresh Start Effect
Multiple studies suggest that only around 8% of people—about one in twelve—who make resolutions manage to stick to them over the long term. This low success rate is often attributed to factors such as setting overly ambitious goals, lacking a detailed plan, or simply struggling to maintain motivation over time. Figures can vary slightly depending on the survey and methodology used, but the general consensus is that a small minority of people successfully keep their resolutions.
Dieting can be tough when you’re hungry. This explains the explosive success of Ozempic, which works by mimicking a natural hormone called GLP-1. The drug signals a feeling of fullness to the brain, and voila, your hunger pangs are quieted. As far as we know, big pharma has yet to invent a pill that will send a frugality signal. If they did, it would likely be the biggest success in the history of financial services.
The Investor’s Triple Threat: Financial Illiteracy, Poor Goal Setting, and Lack of a Clear Plan
Many resolutions fail because people simply don’t know how to achieve their goals; there’s no pill they can take. They may not have a good grounding in nutrition, for example, and even though they maintain strict discipline, they end up eating the wrong things. Or, they may not have been educated about the right kind of exercise for their specific situation. When they don’t see results, they get frustrated and quit.
The world of investing can be very confusing, offering a huge variety of complex options buried under unfamiliar jargon. A lack of knowledge about financial planning and tax laws can make it tough to make or stick with a plan. None of that means you don’t have a situation that requires careful attention.
Let’s say you own a business or a property that has become worth a great deal of money. You may feel reluctant to sell, because selling could trigger a very large tax bill. Not knowing what the best strategy is to minimize or even eliminate that tax, but feeling quite sure you don’t want to stroke the largest check of your life, you do nothing. There is a name for this situation.
Choice under conflict is a term behavioral psychologists use to refer to the decision-making process when an individual faces two or more competing options, each with its own set of benefits and drawbacks. This conflict often arises when short-term desires clash with long-term goals, or when the benefits of one choice directly oppose the advantages of another.
In such situations, the decision-maker must weigh trade-offs, often under conditions of uncertainty, ignorance, or emotional stress, which can result in cognitive dissonance or regret, regardless of the desired outcome. The most common result is to do nothing.
Ultimately, how a person resolves these kinds of conflicts is influenced by factors such as self-control, risk tolerance, and the framing of the choices at hand. Obviously, this can be tough to work through, but this is a good example of when a coach, mentor, or qualified professional can be of great help.
Let’s return to your highly appreciated property or business. You may have heard stories of other people who had somehow avoided some or all of the tax, but you’re not sure how. In actuality, there are a number of ways to exit a situation like that. For example, if you combined the use of a specific kind of trust with a charitable contribution, you could convert this year’s tax liability into a tax-deferred vehicle, much like a 401(k) or a Roth IRA.
Low Risk, High Reward Help is Available
Sophisticated strategies like this almost always require the knowledge of a specialist in tax and financial planning. The good news is that they exist, and they may be able to help you. It’s really no different than working out with a personal trainer or hiring a fitness coach to get you in shape. Having a trainer typically delivers superior results to working out alone.
One of the nice things about getting strategic advice from a seasoned wealth management professional is that it generally costs you nothing unless and until you implement the strategy. Even then, the cost of the professional is generally very small when compared with its potential benefit to you.
“I want to lose weight” is a positive and healthy resolution, but it’s likely to be abandoned because the goal is not very clear—you could lose one pound and declare victory—and it lacks specific, measurable steps. Also, consider that it is not tied to a specific benefit. Perhaps a better resolution could be “I want to lose 17 pounds in the next three months so I’ll look fantastic at my high school reunion. I will limit my calorie intake to 2,000 calories per day, keep a log of what I eat, and weigh myself every day.” You know what you want, why you want it, and how to get it.
Financial planning generally follows that exact sequence: what is your goal, what will it mean to you, and how will you achieve it. For example, about that property, you might say, “I want that property (or business) to provide a lifetime of lifestyle security for me and my spouse, no matter how long we live, with enough left over to leave our kids $1 million each.” Note that the how-to-achieve-it part is missing, and that’s why professional help is necessary.
If you approach your financial planner with that sentence, you’ve done your part. It’s not, and it should not be, up to you to solve that problem. After all, you’re not a wealth management and tax expert, so how could you know what your options are, let alone which among them is ideal for you?
One Huge Difference
Keeping resolutions about diet and exercise is essentially a forever thing. A temporary diet will produce temporary results. That’s just life. But taxes are different: if all the contributions are made according to the rules, a Roth IRA will store, grow, spend, and inherit tax-free for the rest of your life—and for your beneficiaries. This is why a Roth conversion is such a popular tool in financial planning.
Charitable contributions can give you a nice tax deduction in a given year, but a Charitable Remainder Trust could provide a tax-free income for the rest of your life and also eliminate some or all of the capital gains taxes on your assets. Certain life insurance products can assure that your heirs will get that inheritance you plan to leave to them, no matter how long you live.
There are many different strategies that can offset, convert, or eliminate tax obligations, but it’s likely there’s only one perfect one for you. We strongly recommend you resolve to get educated on what your choices are, and implement your best strategy with the help of seasoned professionals.
Financial Gravity’s Legacy Services division is here to help you work through your options with advanced planning and analysis tools. Should you convert your 401(k) or IRA into a Roth IRA? Might a trust shield your assets and ensure your wishes are carried out? Could a specific kind of insurance product provide guarantees that your loved ones will share in your life’s work? There are real answers to these important questions, and we want to help you get them. Book an appointment with me, and let’s start a conversation.
