The Impact of Inflation on Tax Strategy

In Kelly Phillips Erb’s widely popular Taxgirl Podcast, EisnerAmper Tax Partner Timothy Speiss shares his insight on how inflation can impact tax planning strategy.

How to Invest; How Much to Spend

Inflation (rising costs due to supply chain issues, labor shortages and so forth) together with low interest rates are all factors to consider for financial planning. For example, more detailed attention should be paid to 401(k) plans, contributions to health savings accounts, along with other investing opportunities that might not be top-of-mind but can be great savings and assets.

It is beneficial to work with financial advisors who are well-versed in holistic financial planning regarding tax, saving plans and more. For investors of all portfolio sizes, having a well-organized financial plan—whether it is regarding tax, estate, inheritance and so on—can make a major difference. In addition to larger trends such as inflation, experienced advisors evaluate each client holistically, taking into consideration their age, family balance sheet, business structures and more to build a financial model that is tailored to the individual.

A Holistic Approach to Tax Advising

A holistic approach to tax filing includes documentation on all investments. While a recent 401(k) balance statement might not be used for tax filing, financial advisors could find it helpful to be updated on a client’s financial situation throughout the year rather than just when April 15 is approaching. For example, financial advisors should be aware of when clients will need to begin taking age-required minimum distributions.

Charitable Contributions from a Tax Perspective

Many families make charitable contributions that allow them to establish their own formal family foundations. One of the first things they do is apply for exemptions to be able to make charitable contributions on a tax-deductible basis.

Another route for philanthropic families who want to be aware of how much of a contribution to give and to whom is through a donor-advised fund. Donor-advised funds can be implemented through a financial institution, such as an investment firm, or a formal private foundation that is deemed a 501(c)3 by the Internal Revenue Service.

Insurance Policies as Sources of Income and Investing

Life insurance has become a funding vehicle for other purposes, because some families might not necessarily need the policy but would like to use it to fund the family legacy or trust. For many individuals, home and life insurance can be a significant source of income and wealth planning, especially for middle-class families.

With new policy offerings being available constantly, one component to consider is how each policy interacts with other investments. For example, perhaps an individual does not need life insurance for income replacement, but it can be a good fit for charitable planning.

To learn more about how inflation can impact tax planning strategy, listen to the entire podcast segment here.