Tips For Year-Round Tax Planning
Tax planning isn’t a once-a-year-activity. In fact, thoughtful planning year-round can help you reduce your tax liabilities come April, even though tax season just ended.
Being proactive can help you maximize your benefits and minimize any surprises. Following are a few ways to plan for tax season throughout the year – so you’ll be in good shape when you file.
Conduct an income tax projection to prevent surprises at tax time
One of the most important steps to take is figuring out where your taxes stand before it’s too late to make changes. Having a projection of your potential income tax ahead of time gives you more breathing room. It can help you plan more effectively for the upcoming tax season and find ways to reduce your tax burden.
Find ways to reduce income tax
One of the easiest ways to reduce your income tax liability is to reduce your taxable income. You can defer your tax liability — or eliminate it entirely when you make qualifying contributions to specific financial vehicles, such as:
• You can make tax-deductible contributions to a 401(k) plan, 403(b) plan or traditional IRA.
• Health savings accounts (HSAs) give you the triple tax benefit of tax-deductible contributions, tax-free earnings and tax-free withdrawals for qualified medical expenses.
• Flexible spending accounts (FSA) and Dependent Care FSAs (DCFSA) let you bypass taxes to save for healthcare costs and dependent care, respectively.
Minimize capital gains tax on investments
A capital gain refers to selling something for more than you spent on it, such as stocks. The federal government charges you for this profit with what are called “capital gain taxes.” There are several techniques you can use to reduce your tax burden on your investments, including:
• Transfer appreciated assets to a child. If your child is not a dependent and is in a lower tax bracket, they might see significantly less tax for the capital gains.
• Transfer appreciated assets to a charity. You’ll avoid the capital gains tax entirely and, in most cases, be able to claim a deduction for the fair market value of those assets. Read what to consider when gifting stock.
• Take advantage of tax loss harvesting. Defer taxes by using your market losses to offset some of the gains your assets see over the course of the year.
Re-examine your charitable giving
Tax deductible donations can reduce your taxable income, which is one tangible benefit of charitable giving. To claim these donations, you’ll need to itemize your deductions at tax time. However, the current standard deduction may cause you to think twice about donating to your favorite causes.
To make the most of your donations and increase your tax savings, you may want to use a “bunching” strategy. With bunching, you replace several years of smaller donations with a large donation in a single tax year. This allows you to benefit from itemizing your deductions and claiming the tax benefit of your contribution.
If you’re taking required minimum distributions on retirement funds, you have an option available to you in the form of qualified charitable contributions (QCDs). Instead of taking those distributions as cash, funnel some or all of that distribution directly to a charitable organization. You’ll get to enjoy both the high standard deduction and have your donated distribution taken directly off the top of your taxable income. Read more about QCDs.
Work closely with a financial professional
A financial professional can help you see how different aspects of your finances, e.g., taxes, investments, and charitable giving, can work together to help you work toward your goals. Share your vision and take full advantage of their expertise. With a little preparation, you can be more strategic about your taxes year-round.
Jeffrey Schweitzer can be found at Northeast Financial Strategies Inc (NFS) at Wampum Corner in Wrentham. NFS works with individuals and small businesses providing financial and estate planning, insurance, investments and also offers full service accounting, bookkeeping, payroll, income tax preparation, and notary public services. For more information, stop by the office, call Jeffrey at 800-560-4NFS or visit online - www.nfsnet.com
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