Tax preparation has traditionally been a last-minute effort to reduce tax liabilities. However, to build sustainable wealth year-round tax planning should be an ongoing process, not just a once-a-year event. By staying proactive and monitoring your entire financial picture throughout the year, you can fine-tune your tax strategy, reduce your tax burden, and improve your overall financial well-being.
In this article, I explore why consistent, year-round tax planning is essential and offer practical tips for seamlessly incorporating it into your financial routine.
Why Year-Round Tax Planning Matters
There are several upsides to tax planning throughout the year. With just a little bit of preparation, you can significantly lessen the stress traditionally associated with tax season. Planning ahead helps you eliminate any uncertainty you have about the deductions you qualify for as well as how much you might owe.
Tips for Year-Round Tax Planning
While it may seem daunting to plan for taxes year-round, it doesn’t have to be. Here are some easy ways to develop good tax-planning habits all year long.
Optimize Tax-Incentivized Accounts
Health savings accounts (HSAs), 401(k)s, and other tax-incentivized funds are your friends when it comes to taxes. It’s good practice, if you can, to contribute as much as possible to these accounts since it reduces your taxable income and helps you save for the future.
Deferring Income
In years when you are earning a higher income, you may want to consider deferring some of that income to future years, especially if you’re nearing retirement. This strategy is available to employees whose company offers a nonqualified deferred compensation plan, which allows you to defer a portion of your current compensation to a later date.
The deferred income becomes taxable only when you receive it, typically after a triggering event, such as leaving the company, retiring, or reaching a specific age. This approach can reduce your current taxable income and potentially lower your tax liability, but you’ll need to weigh the benefits of deferring income against your cash-flow needs and future tax expectations.
Accelerating Income
During lower-income years—such as after job transitions, layoffs, or business downturns—consider accelerating income. This may include increasing work hours or strategically converting traditional retirement accounts into Roth IRAs. The goal is to take advantage of your lower tax bracket by recognizing income sooner rather than later.
Taking Required Minimum Distributions (RMDs)
Once you reach age 73, you’re required to take RMDs from traditional retirement accounts like IRAs and 401(k)s. (Under the SECURE 2.0 Act, that RMD age will rise to 75 in 2033.) These withdrawals are subject to income tax, and missing them can result in hefty penalties. Managing RMDs effectively requires looking ahead to determine how they might impact other income sources and trigger additional taxes or higher Medicare premiums. One tax strategy to consider is spreading your RMD over the year or converting a traditional IRA to a Roth IRA.
Tax-Loss Harvesting
If you hold investments in taxable accounts, tax-loss harvesting can be a valuable strategy to offset capital gains by selling investments at a loss. This helps lower your taxable income for the year. It’s essential to be aware of the wash-sale rule, which prevents repurchasing substantially identical securities within 30 days of the sale, ensuring the tax loss is valid.
Bunching Deductions
Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chance of going above the standard deduction amount and being able to itemize your deductions in that year, leading to more significant tax savings.
For example, instead of donating $1,000 to your favorite nonprofit each year, you might donate $10,000 in one year, allowing you to itemize in that year and potentially benefit more from the deduction. Bunching can apply to other expenses as well, such as medical expenses, business expenses, or even contributions to a 529 plan. Just be mindful of certain caps or limitations on deductions, so you can take full advantage of this strategy.
Keep Thorough Records
Pay stubs and receipts shouldn’t be kept in a shoebox. It’s important to know how much you made during the year and how much you’ve spent on items that qualify for tax deductions. Technology is on your side here. Apps and software help you keep track of deductible expenses and can automatically organize and track your budget.
Maintain Receipts for Deductions and Credits
Maintain a record of the money you spend on your business, charitable contributions, and any educational costs. All these expenses are potentially deductible, so it’s important to know the largest amount you can claim.
Modify Your Withholding and Estimated Payments
If you have a job, check your withholding to confirm the amount being deducted matches what you anticipate owing. If you’re self-employed, paying estimated quarterly taxes is a smart way to avoid large and unexpected expenses when tax season rolls around.
Get Ready for Filing Early
This final tip makes tax time significantly less stressful. Know in advance the types of tax documents you receive and start collecting and filing them as soon as possible. Once you’ve organized all your documents, you can go ahead and file your taxes. You don’t have to wait until the last minute!
Work With a Trusted Advisor
Year-round tax planning doesn’t have to be overwhelming. When you partner with GLH&C Financial Services, you’re working with a financial advisor who’s “tax-informed,” bringing you comprehensive guidance under one roof.
As part of my wealth management services, I handle your personal tax returns, giving us a deep understanding of your unique tax situation. I leverage this knowledge to incorporate tax-saving strategies directly into your financial plan so they’re seamlessly integrated and never an afterthought. This approach has helped my clients reduce tax liabilities year after year, even across multiple generations.
To get started today, email me at jim@glhcfinancial.com or call 916-967-3208 to see how I can help you pursue your ideal financial future.
About Jim
James Callens is a financial advisor at GLH&C Financial Services, a full-service, comprehensive wealth management firm. Jim has over 30 years of experience in the financial industry and uses his extensive resources and knowledge to help his clients experience simplicity and clarity in their financial lives. Jim spent more than 20 years working for GE Financial Advisors, both in its insurance services department and as a regional manager and financial advisor. He took part in GE’s Six Sigma Quality Training program and completed the National Association of Life Underwriter’s four-year LUTCF course. Jim also earned his certificate in financial planning from the University of California at Davis. In 2011, Jim combined his own firm, Callens Financial Group, with GLH Financial Services, creating GLH&C Financial Services, so he could provide even more value to his clients.
Jim lives in Folsom, California, with his wife, Melissa, and his four children, Jacob, Kristen, Grant, and Andrew. Together, they enjoy outdoor activities like kayaking, bicycling, and vacationing at Lake Tahoe. To learn more about Jim, connect with him on LinkedIn.