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Long Live Tax Season: Tax Planning Year-Round

Long Live Tax Season: Tax Planning Year-Round

December 20, 2023

We’re coming to the end of tax season, but that doesn’t mean we should stop thinking about taxes.  

In fact, this is the perfect time to make a game plan to make tax planning more proactive than reactive. Let’s not wait for the annual tax deadline to start lowering your bill.  

Jamie P. Hopkins, managing director of wealth solutions at Carson Group, notes that tax plans are like thumbprints – we each have a unique one. And we should take into account our unique situations when making planning more proactive.1  

While the following strategies can help you with year-round tax planning, it’s always important to consult your financial professional.  

But here are some general strategies that could potentially help you maximize your money and minimize your tax burden.   

Defer or Accelerate Income 

Rolling your income from high-tax working years into lower-tax, non-working years (like retirement) can be an effective way to reduce taxable income and maximize wealth.  

If your employer offers it, consider a non-qualified deferred compensation plan: by deferring some of today’s pay to another year when your tax rate might be lower. These funds will be accessible (and taxable) when there is a trigger event, like when you leave a job, retire, reach a certain age or die.  

Though this strategy holds great potential for financial security in later life, take caution when predicting future taxes. It’s important to accurately estimate cash flows both for now and for retirement, along with corresponding tax rates.  

On the opposite end of the spectrum is accelerating income.  

If you think you might experience a low-tax year due to a job transition, lower income due to job loss, or slow commission income, this provides a great opportunity to accelerate income into this year.  

There are several ways to do this. Of course, if you’re still employed, there’s the obvious choice of working more hours or getting a side hustle. But if that isn’t feasible for you, then consider selling off assets like real estate or investments as well as doing a Roth conversion.  

Lastly, consider selling your business and doing one of three things: deferring payments until the future, receiving proceeds over installments, or receiving proceeds all at once now in the low tax year.  

Planning for Required Minimum Distributions 

As you approach retirement, it’s important to be mindful of how the taxable deductions from your qualified accounts can add up over time. Once you turn 72, Required Minimum Distributions (RMDs) must be taken out of these qualified accounts (although Roth IRAs are excluded).  

The amount you must withdraw depends on your number on the IRS Factor Table (which you use to divide last year’s account balance). Taking into consideration all additional expenses such as taxes and Medicare surcharges brought about by increased RMDs may help save thousands in taxes.  

Engage in Tax-Loss Harvesting 

Tax-loss harvesting is a popular technique that allows investors to offset the effects of capital gains by recognizing losses in their portfolio. But keep in mind that the 30-day wash sale rule prohibits you from buying identical securities within 30 days after selling an investment at a loss, but tax-loss harvesting can still be performed outside this period throughout the year. We can help able guide you through when and why it’s best to use this strategy, so make sure to give us a call if you have any questions.  

Bunching 

If you're looking for a smart way to save on your taxes, then bunching might be right up your alley. Bunching involves lumping multiple expenses into one year instead of spreading them out. Doing this could increase the chance of going over the standard deduction amount and being able to itemize deductions in single years – ultimately leading to more significant tax savings.  

This strategy isn't just limited to charitable contributions either; you can also utilize bunching with business costs, medical bills and 529 plans. It’s worth noting that certain expenditures are capped each year so plan accordingly by delaying eligible write-offs until next season.  

Let’s Talk!  

Every year brings with it a new opportunity to ensure your taxes are planned for in the most proactive and beneficial manner. It’s crucial you prioritize tax planning and utilize us, because we can help guide you through any strategies that may be applicable to your unique situation. So don't delay, let’s get started on optimizing next year’s taxes today.  

 

Sources:

  1. https://www.financialplanningassociation.org/learning/publications/journal/OCT22-where-taxes-and-retirement-collide-OPEN