PIMCO Education

An Introduction to Tax Planning Strategies

Tim Steffen, senior consultant with PIMCO Advisor Education, takes us through tax planning strategies for 2021 and beyond, including the importance of a multi-year plan, qualified dividends and capital gains, and updated investment income tax rates. Interested in Continuing Education on the topic? Visit pimco.com/advisoreducation

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Text on screen: PIMCO

Text on screen: PIMCO Education; TITLE – 2021 Tax Planning Strategies; SUBTITLE  with Tim Steffen (6 minutes)


Hello everyone. My name is Tim Steffen. I'm a senior consultant with PIMCO Advisor Education team.
Text on screen: Tim Steffen, Senior Consultant, Advisor Education

I've been in the tax business for a long time, been doing this for a long time, and one thing I've learned is that as soon as you think you understand tax laws, you got it all down, and got it all figured out, things change. Big things can happen…

Image: U.S. Congress, 1040 tax paperwork

… like the Affordable Care Act or the Tax Cuts and Jobs Act, or smaller bills can happen that have significant pieces to them, like the recent SECURE Act or the Cares Act.

What I'm always reminded of though is that taxes can be interesting and can be challenging and can be a great way for us as advisors to provide value to our clients.

Now, before we get into that, some of you may be thinking, "Okay, you may find taxes interesting and fun, but shouldn't my job as a financial advisor really be more focused on portfolio management, and maybe leave all the tax stuff to the CPAs out there?"

Here's my thought on that.

Text on screen: Title – The importance of professional advice; Subtitle  The gap: Service expected vs. services received; A bar graph shows services expected (blue) vs services received (green). Tax planning advice is outlined in red and shows a 92% rate for services expected vs. a 25% rate for services received.

This slide shows you the results of a survey that was done asking financial advisor clients the services they expect to receive from their advisor and the services they are actually receiving, and it shows you the gap between expectations and reality. Now as you might suspect, we do a great job in the investment management side. We meet our clients’ expectations pretty well there.

But look at all these other services, and in particular, I want to call out tax planning advice. The reality is our clients are looking for help in these areas and for the most part they are not getting it. There's an opportunity here for advisors to really fill that gap, provide an added-level services to their clients that may go above and beyond what clients are actually receiving from other advisors.

Text on screen: The importance of a multi-year plan

This brings us to one of our first planning strategies today, and that is understanding the importance of multi-year planning for your clients.

Tax planning can't be done in a single one year vacuum. You have to look at a clients' multi-year income history and planning into the future to understand the true impact and the true benefit of some of the planning strategies you might suggest.  Even just looking over a two year can go a long way to helping you to decide what are the right strategies to suggest.

Text on screen: Title – Review multi-year tax planning considerations for individual tax payers; Subtitle – Higher tax year; Bullets – Increase retirement plan contributions, accelerate charitable giving, recognize capital losses, avoid capital gain (ex: collars), defer retirement account distributions; Subtitle – Lower tax year (outlined in red); Bullets – Accelerate income recognition (ex: ESOs), defer charitable giving, delay pass-through business expenses, recognize capital gains, consider Roth conversions.

For example, if you look at a client situation this year compared to what you might see in 2022, if this turns out to be a higher tax year, you might do some things to help reduce that income: by increasing different expenses or deductible expenses, such as, retirement plan contributions, or charitable giving, or maybe recognizing some capital losses while avoiding additional types of income, such as capital gains or retirement account distributions.

On the other hand, if this is a low tax year relative to what they expect in the future, you might do the opposite. In that case, you might accelerate some income. Maybe, through the exercise of employee stock options or through a Roth conversion.

You also consider deferring some of those deductible expenses, such as charitable gifts or pass-through business expenses that might have more value to you in a future year when you're in a higher tax bracket.

Text on screen: Title – Life events to consider, Bullets – Marriage/divorce, birth of a child, death, retirement, self-employed

In addition to the changes in your income and deductions, also be aware of life events that might impact your tax planning from one year to the next. Things like getting married or getting divorced, the death of a spouse or retirement, can all have significant impacts on an individual's tax bracket and filing status from one year to the next. So, understanding exactly when those things might be happening and how they might impact some of your planning strategies can go a long way towards managing your client’s tax liability.

Text on screen: Qualified dividends and long-term capital gains

Let's move on to some of that maybe a little closer to the type of work that you're doing for your client, and that has to do with the investment income.

And we're going to begin by talking about some of the unique tax rates that apply to certain types of investment income, namely, qualified dividends and long-term capital gains.

Now, if I were to ask you the tax rates on long-term capital gains, most of you would probably say 15% or so. It's important to recognize that for capital gains, there are actually subject to a bracketed system.

FULL SCREEN GRAPHIC: Text on screen: Title – Investment income tax rates; Subtitle – Long-term capital gains and qualified dividends – 2021. A table portrays tax rate for married, filing jointly, and single taxable income brackets.

There are two important things to understand about capital gains and the tax rates on those. First of is there are multiple tax brackets, as you can see from the slide here, there's a 0% tax bracket for people with very low levels of income. A 15% bracket that applies to a large swath of taxpayers, and then a 20% rates for those in a top bracket. In addition to that, you also have the 3.8% of that net investment income tax. It kind of slips in between the 15% and the 20% rate. You got to understand that there are multiple brackets, and as your capital gain gets larger, you move through those brackets. You still get the benefit of a lower brackets. But a large enough gain could be subject to multiple tax rates on capital gains side. The other more important thing to consider on this is that we're starting point within these brackets, you don't get to automatically start at the bottom of the bracket. Your starting point here is going to be based off all your other income.

So, for example, if you're a married couple and you have $400,000 of other ordinary income, you'll find yourself at the high end of the 15% tax rate on capital gains. And for the next $100,000 of capital gains you incur roughly, you would pay tax at 15%. But any capital gains over that amount that push you over that 501,600 number you see, those additional gains are taxed at a 20% rate. So again, you can see where it's difficult to answer a client question, what's a tax rate on my gain, without knowing the size of the gain, as well as what other ordinary income they might have that will dictate their starting point within these brackets.

So just to wrap up today's session, a few things you can take away from this. First of all, you're doing the first one right now, deepen your understanding, your knowledge of tax, including those on both income and investments. Understanding these things can be a great way to add value to your clients going forward, so make sure you take the time to learn some of these things we have been talking about today. Secondly, understand your client situations better. Make sure you know what is their filing status, what marginal bracket are they in? Are they itemizing or they're taking the standard deduction? Are they subject to AMT or not? Understanding those things can go a long way towards driving some of the recommendations you might make for them.

And lastly, be sure to engage with the clients' CPA to discuss any of the strategies that you might be considering for your client. Make sure you and the CPA of the client are all working together to provide the best financial advice of your clients going forward.

Text on screen: Looking for additional Tax Planning education? Contact your PIMOC account manager or visit pimco.com/advisoreducation for Continuing Education and printable resources.

Text on screen: PIMCO; Graphic – 1971 – 2021, 50

All investments contain risk and may lose value.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.  Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.                                

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO.

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626.


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