As the annual tax filing deadline nears, you may find yourself scrambling to gather receipts, tax forms and paycheck stubs. If you are wishing you had done more earlier in the year to prepare, you’re not alone!
However, the benefits of advanced preparation go beyond avoiding the last-minute tax filing scramble. Engaging in year-round tax planning can also save you money. As you begin planning for next year’s tax filing deadline, consider implementing the following year-round planning strategies.
#1 – Get organized.
An organized approach to tax planning can help you avoid the end-of-year scramble to pull together your tax records, which can result in a more streamlined (and less stressful!) tax filing process. Maintaining organized records of your income, expenses and deductions can also help ensure you don’t overlook opportunities for deductions or misreport your income, which can reduce your risk of penalties and audits.
#2 – Improve the tax-efficiency of your investment portfolio.
Continuously monitoring your investment portfolio throughout the year allows you take advantage of tax-saving opportunities, such as tax-loss harvesting and periodic rebalancing. It’s also important to pay attention to automatic account features, such as automatic reinvestment and default cost basis, as these features can significantly impact your tax liabilities.
#3 – Maximize tax deductions and credits.
One of the main benefits of year-round tax planning is the ability to maximize your tax deductions and credits. Ongoing tax planning provides an opportunity to access deductions related to healthcare expenses, charitable giving, retirement plan contributions, mortgage interest and more. If you wait until the end of the year to gather your deductions and credits, it could be too late to maximize your benefits.
#4 – Consider bunching itemized deductions.
“Bunching” is a strategy that allows taxpayers who don’t normally file an itemized tax return to maximize certain deductions. Instead of taking the standard deduction every year, you may be able to group multiple years’ worth of charitable and healthcare expenses into a single year in order to increase your deductions above the standard filing threshold. This allows you to file an itemized tax return and maximize your deductions.
#5 – Take steps to lower your taxable income.
Engaging in year-round tax planning provides an opportunity to lower your taxable income throughout the year. Contributing to the following savings vehicles can help reduce your income.
- Qualified retirement account, such as a 401(k), 403(b) or traditional IRA
- 529 college savings plan
- Health savings account (HSA)
- Flexible savings account (FSA)
- Dependent care savings account (DCFSA)
#6 – Plan for fluctuating income.
If not properly planned for, variations in income can lead to unexpected tax consequences. That’s why it’s important to plan for any anticipated income throughout the year. Consider whether you will have any fluctuations due to a stock sale, bonus, real estate income, capital gains, etc. Work with your tax advisor throughout the year to evenly spread out your tax obligations and avoid unnecessary underpayment penalties.
#7 – Consider a Roth conversion.
If you experience a year in which your income is lower than normal due to a job loss, retirement, market fluctuations, reduction in work hours, etc., it may make sense to consider a Roth conversion. This involves moving money from a pre-tax retirement account to an after-tax, or Roth, account. Once in the Roth account, assets can continue growing free from taxes, and withdrawals in retirement are also tax-exempt.
A Roth conversion requires that you pay ordinary income taxes on the amount converted, which is why it makes sense to complete the transaction during a low-income year.
It’s also important to note that there is a five-year waiting period for withdrawing converted Roth assets. Assets held in the account for less than five years may be subject to penalties when withdrawn.
Could you use some help implementing year-round tax planning strategies? We would love to have a conversation. To learn more about how United Capital Financial Advisors can help maximize your income and lower your tax liabilities, please contact us.
