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Minimize Your Tax Liabilities With Smart Investment Strategies

Financial Planning, financial advisor San Antonio Oct 27th, 2022 by: Darryl Lyons

As Mark Twain stated, “The only two certainties in life are death and taxes.” No one wants to pay more in taxes than is absolutely necessary. Understanding what tax deductions or tax credits you may be eligible for can be a step towards lower taxation.

Remember this tip: the key to limiting your taxes is reducing your gross income that is subject to taxation. The good news is you can work toward minimizing your tax liabilities with the assistance of a financial advisor who specializes in tax planning services in San Antonio. 

In this article, we’ll explore some tactics you can use as you consider building a tax planning and investment strategy:    

  • The importance of hiring the right financial advisory team to help you create a tax planning and investment strategy
  • Tax-efficient investing tactics
  • The power of retirement contributions
  • Leverage your pre-tax dollars by contributing to your employer-sponsored retirement plan, like a 401(k)
  • You can reduce your income if you had to realize a loss on an investment that lost its value
  • Tax-advantaged vs. taxable investing strategies
  • Charitable donations are another way for you to increase your itemized deductions which can lower your gross income

 

Tax planning and investment professionals in San Antonio

One of the first steps to creating a tax planning strategy for your investments is hiring a financial advisor in San Antonio who shares the same investment values and philosophy as you. Working with a CFP® professional, they can assist you in leveraging your tax-advantaged savings opportunities, including any tax breaks you may be eligible for as part of your tax and financial planning strategy. 

When you are interviewing advisors to manage your financial future, consider these questions:

  1. What is your background, especially related to tax planning strategies?
  2. What certifications do you hold? 
  3. Can you coordinate your efforts with my accountant?
  4. Can you help develop and/or review my financial plan to ensure I’m on track to meet my goals?
  5. Are you a financial fiduciary?

Make tax planning in San Antonio, TX, a part of your investing strategy as a way to lower your tax liabilities. Read our latest guide!

 

Asset allocation

Ensuring you have the correct allocation within your portfolio(s) is an important part of the tax planning process. If you are over-allocated in a particular asset class that is not performing well, there may be an opportunity to sell the holding and realize a loss that could offset your tax liabilities.  

Your financial planning professional can assist you with this type of assessment. 

 

Taxable, tax-advantaged, and tax-exempt accounts

As you start your tax planning efforts, it’s important to understand how your money is affected based on the type of account that it is placed into. Tax-advantaged and tax-exempt accounts have rules regarding how much money you can contribute annually. 

When it comes time to take distributions from these accounts, talk to a Texas financial advisor for proper guidance. The PAX Financial Group can help you navigate your retirement planning efforts. 

 

What are taxable accounts?  

These accounts do not have any associated tax benefits. With that said, they also come with fewer penalties or restrictions than tax-advantaged accounts, as an IRA or 401(k) have. You can withdraw your money at any time and for any reason with no penalties. 

 

What are tax-advantaged accounts? 

Typically, tax-deferred accounts, like 401(k)’s and traditional IRAs provide you with a tax break upfront as the funds you are depositing into the accounts are not taxed. Each year you contribute to the account, you can then claim a deduction of your contributions which provides an immediate tax benefit. Because the dollars going into the accounts are not taxed upfront, you will pay taxes when you begin to withdraw funds from the account once you retire.  

 

What are tax-exempt accounts?

These accounts (Roth 401(k) and Roth IRAs are different from traditional IRAs and 401(k) in that any contributions made to the account(s) are with after-tax dollars. While you don’t receive the upfront tax break that you do with tax-advantaged accounts, the investments within the account grow tax-free and any qualified withdrawals are tax-free as you have already paid taxes on the funds that were initially deposited into the account.  Read about when a 401(k) to a Roth conversion makes sense, and when it doesn’t.

 

Buy and hold: capital gains should be long-term

Any investments that you sell within one year or less of purchase are considered “short term” and taxed at a higher rate than long-term capital gains (taxed at a lower rate). 

Buying and holding for the long term means keeping money in investments for more than one year before selling them to qualify as long-term capital gains, which are taxed according to graduated thresholds.

 

Maximize your retirement savings every year

When possible, you should consider maximizing your annual contributions into either an employer-sponsored account, like a 401(k) or into a traditional IRA. These contributions will assist in not only building your nest egg for retirement, but also reducing your tax liability each year. 

 

Tax-loss harvesting

Tax-loss harvesting is a strategy that allows you to use losses from an investment(s) to offset any capital gains you may have realized from another investment. You could own a few individual stocks and sell them to achieve this benefit.

So how does tax-loss harvesting work? In short, at year’s end, you sell some of your losing investments at a loss. You then use these losses as deductions on your federal income taxes and state returns against any gains made throughout the year. 

 

Invest in municipal bonds

“Munis” can help preserve capital while generating interest. Even though they are not as liquid as some other investments, they offer tax benefits for investors:

  • Most are exempt from federal taxes
  • Some are exempt from state and local taxes
  • They do not incur estate taxes
  • Be careful of the bid-ask spread

Consider real estate investments

Real estate has historically held its value, especially in inflationary times. It’s important to note that real estate transactions can carry risk. Real estate investments typically are not liquid like investments traded on the stock market. If you are considering investing in real estate, you should speak with a financial advisor in San Antonio to see if real estate investing is appropriate for your situation. The PAX team can help. 

 

Consider a charitable donation of stock

computer keyboard and one of the keys says planned giving signifying estate planning in TexasIf you have appreciated stock that you would like to donate to charity, one option is to donate the appreciated stock directly. This will allow you to avoid capital gains tax on the sale of your stock, and deduct the full fair market value of your donation. You can also take advantage of direct donations on short-term capital gains, which allow you to donate up to 50% of your adjusted gross income each year. 

Those who enjoy giving as a form of biblical investing and faithful living also understand the importance of receiving. Using these types of tax strategies can help you achieve your financial goals while assisting those in need. 

 

Consider index funds

Index funds can help to mitigate your tax bite. When you invest in an index fund, you're buying stock in a fund that holds many different stocks and/or bonds. These funds have low turnover—meaning it takes them longer than other mutual funds to sell holdings for capital gains tax purposes.

  • Index funds are passive investments (no active management required) 
  • Index funds can be tax efficient
  • Index funds can be used for retirement savings and college savings

Conclusion

The good news is there are ways for you to minimize your tax situation. The better news is there are tax planning professionals who can help you devise a strategic investment plan to assist with this effort, both during your working years as well as once you retire.  

The financial and retirement planning professionals at PAX Financial Group have years of experience helping high-net-worth individuals and their families build tax-efficient financial plans.

Biblically Responsible Investing | PAX Financial Group, LLC

 

*Biblically Responsible Investing(“BRI”) involves, among other things, screening for companies that fit within the goal of investing in companies aligned with biblical values. Such screens may serve to reduce the pool of high performing companies considered for investment. Investing involves risk. BRI investing does not guarantee a favorable investment outcome. 

This material is provided by PAX Financial Group, LLC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The information herein has been derived from sources believed to be accurate. Please note: Investing involves risk, and past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All market indices discussed are unmanaged and are not illustrative of any particular investment. Indices do not incur management fees, costs and expenses, and cannot be invested into directly. All economic and performance data is historical and not indicative of future results.

 

Darryl Lyons

Darryl Lyons

CEO and co-founder of the PAX Financial Group, Darryl Lyons has been a licensed professional in the financial services industry since 1999. A lifelong Texan, Darryl began his career in the financial sector just one day removed from earning his bachelor’s degree in corporate financial management and accounting at St. Mary’s University. Throughout his career, he has won awards for recruiting and development from Fortune 100 companies. In January 2007, he chose to begin and develop his independent practice. He joined Andres Gutierrez and Joseph Schuetze to form the PAX Financial Group. Darryl also served as the Chairman for Brooks Development Authority. Shortly after his service, Mayor Julian Castro, named a park “The Darryl W Lyons Park” in honor of his service. He was named to the 2010 San Antonio Business Journal’s “40 Under 40 Rising Stars,” which honors people making a difference in business and in the community.

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