Make Tax Planning on Ongoing Event and Save Money
Impactful Strategies for Making Tax Season a Breeze
It’s here! Everyone’s favorite part of the year - tax season. Right? Right?!
Of course, I am being facetious. Even if this is your favorite part of the year, I presume taxes aren’t the reason why. Even most accountants, some of whom eat, breathe, and drink taxes, don’t count this as their favorite time of year. Taxes can be a slog. There are decisions to make and records to compile. You either must file your taxes yourself, a task even ‘DIYers’ dread, or you drag a big pile of papers into your tax preparer’s office, spilling over from the folder or box, barely succeeding in keeping it all inside. Worse, recent years have produced new and updated tax laws that confused many as to how much they'll owe.
The only consolation is that soon you will be done. Your taxes will be signed and filed, a refund may be received, or you may have to pay in. Either way, it’s over; it’s unlikely the IRS will come for you, and you don’t have to think about this for another ten months. Phew!
Well, I’m here with some more good news. Your taxes, or at least thinking about your taxes, should be an ongoing event. Tax season, in other words, is never-ending, even though tax filing is primarily relegated to February-April. You thought I said good news? Well, I did! This is good news, and I am only being slightly facetious this time.
It’s common to see filing your taxes as an administrative event. This isn’t necessarily wrong. It’s something we all must do. But there is a disconnect here because most people are also looking to reduce their tax burden during tax season and end up dissatisfied with the entire process because they didn’t. You see, there’s usually very little you can do to reduce your tax burden retroactively.
That’s where tax planning comes in. If filing your taxes is a backward-looking administrative task, tax planning is a forward-looking process that helps you reduce what you pay to Uncle Sam, plan future financial decisions, and get organized in the process!
It’s also more fun. Seriously!
7 Ways Effective Tax Planning Helps Families and Retirees
Helps you organize your financial life and prepares you for tax season
It takes the pain and guesswork out of tax season.
Helps you reduce your annual tax bill
Ensures you pay only what you are legally responsible for, and no more.
Takes advantage of opportunities to pay taxes in low earnings (or low tax bracket) years
Takes advantage of opportunities to defer taxes in high earnings (or high tax bracket) years.
Teaches you to be more financially and tax-savvy!
Now, that doesn’t sound so bad, does it? Who wouldn’t like to make tax season easier and less stressful or reduce their tax bill if possible?
Lucky for all of us, there are countless tax planning opportunities to consider.
9 Tax Planning Strategies to Consider
Roth Conversions in low-income years
Increasing contributions to tax-deferred retirement accounts to reduce your annual tax bill
Contributing to a Health Savings Account
Charitable Planning, especially in high-income years.
Real estate decisions
Harvesting Losses in your taxable investment account
Offsetting investment gains or even taking gains in low marginal tax rate years
Changing what investments are held in which accounts within your investment portfolio to ensure your portfolio is as tax-efficient as possible over the long-term.
Deciding what to do with restricted stock, stock options, or other executive compensation options.
This list is by no means exhaustive. Moreover, if you are a real estate investor or a business owner (or have a side hustle like a consultancy, etc.), there are even more opportunities to consider.
Tax Planning & Financial Advice
Effective tax planning is at the heart of effective financial planning and should be a topic you cover at least annually with your financial advisor. Working closely with a tax-savvy financial advisor can help you stay on top of impactful tax events before they arise, allowing you to plan and implement a strategy that can reduce your overall tax bill.
When you look at your personal finances holistically, you realize that most every financial decision – whether concerning investments, savings, or cash flow – has implications on your tax return. To ignore this is to ignore an incredibly rich opportunity to optimize your financial life.
As you organize your documents to file taxes this year, remember that it doesn’t stop here. Though it’s easy to think in a gross of tax world (gross income, gross savings, etc.) we actually live in a net of tax world.
Make tax planning an ongoing event and reap the rewards of a savvier financial life.
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