Tax Season is Every Season

Introduction

Tax season is in full swing.  As we write this blog, we are about a month away from the annual April 15 Tax Day deadline.  Most people think about taxes once or maybe twice a year at most, particularly this time of year.  But we think tax season is every season.  

In keeping with our 2022 theme of “Planning with Purpose” we would like to suggest four basic ways that could help you be more tax aware throughout the year. Taxes have somewhat of an outsized impact on the recommendations we make and how we manage investments - taxes can impact asset returns, income and cash flow, liquidity events, estate plans, retirement, education funding, and much more.  There needs to be a balance, of course since sometimes minimizing taxes is not possible, or at least the effort to do so is not always worth the potential reward if the tax reduction is minimal.  As mentioned below, sometimes there are tradeoffs between saving on taxes now at the risk of increased taxes later.  It’s something we think about a lot as we work with clients.

Four Simple Tax Planning Concepts

Proper planning for taxes includes immediate, intermediate, and long-term timelines.  

We often think about the short-term, mainly the preparation of the upcoming tax return or how to reduce projected taxes near the end of the year. But again, we suggest that taxes be considered throughout the year so that you can wisely and purposefully plan for the best results in reducing long-term tax burdens. No one wants to pay any more than necessary. How many times have you heard or even commented “I am willing to pay my fair, legal obligation, but no more!”  Studies have been made as to the positive impact of proper tax planning on a long-term financial and retirement plan. Not a surprise!  Effective tax management can result in tax expenditures being less, and compounded investment returns on taxes saved has a positive impact on retirement portfolios.  So, with that said, let’s explore four useful ideas. 

1) If you are employed, participate in your employer’s 401k plan and strive to obtain the full match provided by the employer (2022 contribution limits up to $20,500 and if, over the age of 50, a special catch-up provision allows up to $27,000). The traditional 401k contribution reduces taxable income and grows tax deferred. We recommend signing up for the 401k as soon as the employer’s plan allows.  

2) If you don’t have a 401k offering, consider an IRA contribution up to $6,000 0f taxable wages or up to $7,000 if over 50. These limits are per person. Special rules apply if you have a higher income or if one spouse is in a 401k or other employer plan while the other spouse is not. Please contact us and we can guide you through these special rules.  

3) Understand your marginal tax bracket rate, take advantage of bracket management. The marginal rate is the percentage rate at which your next dollar of income will be taxed or what percentage of savings that a deduction will reduce your taxes. The tax system is graduated with different rates for single, joint, or head of household individuals. Understanding where your taxable income falls on the rate schedule can guide you on whether it is wise to recognize more income or claim more deductions. For example, if you still have several thousand dollars before you bump up to the next tax bracket, you might consider converting some of that remaining lower income into a Roth IRA. You are taxed on the amount of the Roth conversion but if proper rules are followed, you may be able to have future lifetime tax-free income from the Roth investment. 

4) Understand capital gains rates versus ordinary income rates. Generally, ordinary rates are higher than capital gains. Presently, ordinarily, rates can go as high as 37% when capital gains top out at 20% (possibly 23.8% due to additional tax on higher-income taxpayers). To qualify for the preferential capital gains rate, an asset must be held for at least one year before selling. Under present laws, several thousand dollars of gains can be tax-free for lower-income taxpayers. Various tax planning strategies can be implemented around when to sell an investment and harvesting tax losses as well. See the following link for 2022 tax rates.  https://taxfoundation.org/2022-tax-brackets/  

Taxes can be very involved, and we only touched the surface of only four ideas available. These four topics can have several immediate, intermediate, and long-term strategies with purposeful planning. 

Next Steps – Personalized Tax Planning

As your financial planners, we are happy to help you plan for taxes throughout the year – during every season. The best way for us to get started is to have a copy of your most recent tax return. After you file your taxes this year, we encourage you to upload your tax return to your client portal, so we can help you throughout the remainder of the year on tax-smart strategies that are custom-tailored to you and your family.

If you are not currently using our client portal, be sure to read or watch more here, and reach out to one of our advisors to get started!

This information is not intended to be a substitute for specific individualized tax advice. 

We suggest that you discuss your specific tax issues with a qualified tax advisor

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