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Comprehensive Guide to Tax Planning Strategies


Taxes can have a major impact on your financial and investing plans. Planning out your taxes ahead for these costs can make your financial plan much more tax efficient. While many people only think about taxes when they’re filing in the spring, tax planning should be a year-round matter. That’s because all financial and investment decisions you make have a tax impact – even if that impact won’t be felt right away. However, there are steps you can take to reduce your tax bill as you build out your financial plan. A financial advisor can also help you plan out your tax situation over the long term.

Utilizing Timing in Your Tax Planning Strategy

Timing can make a big difference when it comes to your year-end tax bill. When you sell assets or pay your debts can make a big difference.

If you look at the investments in your non-retirement accounts at the end of the year, and see which investments are winners and losers, you might want to decide whether to sell these winning or losing investments. Selling those investments can affect your tax situation for the year.  You can use up to $3,000 in short-term losses to offset up to $3,000 of regular income each year. However, you can carry forward unused short-term losses for future use. Figure out which of the investments in your portfolio you want to sell now or later, depending on how it will affect your present and future tax plans.

There are other ways to plan ahead for spending that can help you reduce your tax bill. Charitable contributions can affect your tax bill as well. If your charitable giving doesn’t typically push you above the standard deduction amount, you might want to consider bunching deductions. That essentially means you donate several years’ worth of charitable gifts in a single year, which ends up pushing you above the threshold so you benefit from itemizing your deductions. A tax attorney or another financial professional can help you figure out how to time your giving and how to plan for that.

If you invest in the stock market, planning out your time holding certain investments is incredibly important. Earnings made from investing are called capital gains, and whether they fall into the short-term or long-term buckets can have a major effect on your tax bill. In fact, if you can plan ahead to reach long-term status with your investments before selling them, you’ll receive much more favorable treatment from the IRS.

Short-term capital gains are what they sound like: earnings that come from an investment you sold within one year of its purchase. In turn, you can reach long-term status by holding the investment for at least a full year prior to its sale. The latter is looked at more favorably by the federal government.

When it comes to capital gains tax rates, short-term rates are the exact same as income tax rates, which vary from 10% all the way up to a hefty 37%. Long-term capital gains rates are much lower at 0%, 15% or 20%. Having a strong planning strategy in place for reaching this long-term status can offer you access to these much lower rates.

Planning Ahead for Your Taxes

It’s a lot easier to have good timing when you plan. An advisor can help you figure out the right timing, but they can also help you stay aware of how your personal financial choices affect your tax plan. In addition, they can help you figure out all of the tax considerations you need to take into account for your financial and investment decisions ahead of time. And if you’re working with them year round, they can let you know when emerging tax issues call for changes in your financial plans.

Remember to document your financial decisions throughout the year. In other words, save your receipts. When you complete your tax return, you get to choose between the standard or itemized tax deduction to determine your taxable income. The standard deduction is a dollar amount that the government sets. You can claim the standard deduction without any additional accounting or evidence.

However, you may find that your actual deductible expenditures end up being more money than the standard deduction amount. If that’s true, you’ll be able to pay less in taxes if you use the itemized deduction method. To claim an itemized deduction, you’ll have to use other receipts and documents to prove you spent the amount of money you claim on tax-deductible expenditures.

Come up with an organizational system that works for you and begin saving receipts that can document potentially tax-deductible expenditures. You’ll want to save your receipts even if you claim the standard deduction. That way, you’ll be able to make an informed choice about which method will save you more money when you file your taxes.

Contribute Money to Tax-Advantaged Holdings

Tax Planning

You might want to talk to an advisor about which of these tax-advantaged holdings would work for you, and how much you should be putting in them to lower your tax bill.

Tax-Advantaged Retirement Accounts

You can reduce your taxable income by contributing to a retirement plan, like a 401(k) or IRA. If you’re under the age of 50, you can contribute up to $20,500 a year to a 401(k) in 2022 or $22,500 in 2023. For an IRA, those under 50 can contribute up to $6,000 in 2022 or $6,500 in 2023. Starting at age 50, you can begin taking advantage of both IRA and 401(k) “catch-up” contributions. For IRA account holders, that means an extra $1,000 a year to contribute, while 401(k) account holders can contribute up to $6,500 more in 2022 or $7,500 more in 2023.

The money you contribute and the earnings you make are tax-deferred until you make withdrawals. That means you can deduct the amount you contribute to your IRA or 401(k) from your taxable income, and do not pay any tax on that money until you withdraw it. However, if you are covered by a retirement plan like a 401(k), you may not be permitted to deduct your IRA contributions from your taxable income.

Remember to look into a Roth IRA or a Roth 401(k) plan as well. Although contributing to these accounts will not reduce your taxable income for that year, it may end up reducing your overall taxable income. Although the money put into a Roth account is after-tax dollars, the gains you make in Roth accounts are not taxed when you draw from that money in retirement.

529 College Savings Accounts

If you have a child or are helping save for a family member’s college, you should consider contributing to a 529 college savings account before the end of the year. Although these contributions are not deductible for federal taxes, over 30 states and the District of Columbia offer a full or partial deduction or credit for contributions to a 529 plan.

ABLE Accounts

An estimated 20% of households with children under 18 are estimated to have a child with special needs. Those with special needs and their families can contribute up to $16,000 in 2022 or $17,000 in 2023 into an ABLE account. The limit is even higher if the person with the disability is working and does not participate in a workplace 401(k) or other retirement program.

Money is put in after taxes are paid, and earnings growth and qualified withdrawals are tax free. In addition, states allow you to deduct your contribution to this savings program. In Massachusetts and other states, there is no minimum to open the account and no annual maintenance fee.

Take Advantage of Tax Credits

Tax Planning

You may be eligible for certain tax credits. Refundable tax credits will not only lower your taxes, but can be used to create a surplus, which can get you a refund. Especially in years where you made a lot of money, these can really come in handy.

Some of the most common refundable tax credits include the following:

The American Opportunity Tax Credit

  • Individuals who pay for college or university for themselves or other qualifying individuals may be eligible for this tax credit. In 2022, you can get up to $2,500 per qualifying student. Fully 40 percent of this tax credit is refundable.

The Child Tax Credit

  • You may be eligible for this credit if you have qualifying dependent children under the age of 17. You could get up to $3,600 in 2022 with this tax credit.

The Child and Dependent Care Tax Credit

  • You may be eligible for this tax credit if you must pay for childcare or care for disabled dependents.

The Earned Income Tax Credit

  • Low-income earners may be eligible for this credit. Your eligibility will depend on your earnings, filing status and the number of dependent children you have.

Bottom Line

Aim to start planning for your taxes as soon as that tax year begins instead of scrambling at the last minute in April of the next year. That way you can begin to document all of your deductible expenditures and figure out which tax credits you may be able to take early on. If you haven’t kept all your receipts, you can still start on your taxes early, figure out what tax credits and retirement accounts might help you save money and start documenting potentially eligible expenditures.

Tax Planning Tips

  • Consider talking to a financial advisor about fully incorporating tax planning into your personal financial planning. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you usually owe a lot in taxes at the end of each year and it’s a stressor on your wallet, you may want to adjust the withholding amounts on your W-4 so you can budget better throughout the year and pay less in taxes when April rolls around.

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