Taxes often become a source of stress only when deadlines are approaching and documents start piling up. The challenge is that by the time tax season arrives, many opportunities to reduce tax liability or improve financial efficiency may have already passed.
Waiting until the last minute can leave taxpayers feeling reactive instead of intentional, especially during years involving changing income, retirement planning, investments, or business growth.
This is why year-round tax planning is such an integral part of a long-term financial strategy. Taking a proactive approach throughout the year may help reduce unnecessary taxes, uncover planning opportunities earlier, and better align your tax decisions with your broader financial goals.
In this article, I share insights into why year-round tax planning matters, along with tips that make it easy to integrate planning throughout the year into your financial routine.
Why Year-Round Tax Planning Matters
There are several upsides to tax planning throughout the year, including:
- Reducing time pressure and stress during tax-prep season
- Avoiding missing certain year-end deadlines
- Allows for maximizing contribution limits
- Helps provide confidence and planning for available deductions to reduce taxable income
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 the Use of Tax-Advantaged Accounts
Traditional IRAs, Roth IRAs, 401(k)/403(b) retirement accounts, and health savings accounts (HSAs) are all effective, tax-friendly ways of both saving for the future and saving tax dollars. If you can, create a financial habit to contribute regularly to such accounts, reducing taxable income (where applicable), and increasing tax-deferred savings for your future.
Deferring Income
As your income increases throughout your working years, deferring part of that higher income for retirement offers both a current tax deduction and opportunities to grow your savings for the future. One effective strategy is to confirm your payroll deductions are structured to maximize any available employer-match contributions, if offered.
Some larger employers may offer “deferred compensation” programs to executives and key employees. By deferring some of your income to such a program, you might lower both your tax bracket and your overall tax liability each year, since you are only taxed on this deferred income when withdrawn in retirement. Working with a financial advisor can help balance the benefits of deferring income against current cash flow needs and future tax and expense expectations.
Accelerating Income
During lower-income years, such as early retirement or during a job transition or layoff, consider strategies to accelerate or aggregate tax liabilities. For example, a full or partial conversion of traditional IRA assets into a Roth IRA can be an effective strategy in taking advantage of a temporary lower tax bracket situation, allowing for great tax-free growth of retirement assets.
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 for certain individuals). 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. Strategies to lower the impact of RMD income include Roth IRA conversions and directing unneeded RMD income to charitable causes, where the charitable deduction offsets the taxable distribution.
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. These losses can help to both offset otherwise taxable investment gains and, subject to IRS limitations, may offset a portion of ordinary income. 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 chances of your total itemized deductions exceeding the standard deduction amount and you thereby have a larger deduction against income, 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 and business expenses. Just be mindful of certain caps or limitations on deductions, so you can take full advantage of this strategy.
Keep Thorough Records
Keeping organized digital records throughout the year can make tax planning and preparation significantly easier. 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 records of out-of-pocket business expenses, mileage for business purposes, charitable contributions, and educational costs. Self-employed individuals and eligible business owners may also benefit from tracking home office expenses and related utility costs when applicable under current tax law. Having this information already available makes tax preparation much easier.
Modify Your Withholding and Estimated Payments
If you are a W-2 employee, after each tax season, check your federal/state tax withholding to confirm it matches your anticipated tax liability for the coming year. If you are self-employed, accurately paying estimated quarterly taxes can help to avoid underpayment penalties or large tax surprises when you file each year.
Get Ready for Filing Early
Know in advance the types of tax documents you’ll need to file your return and start collecting them as soon as available. These include W-2 tax forms, 1099 income statements, 1099R distribution forms, and 1095-A medical insurance statements. Preparing early can help reduce stress and improve filing accuracy.
Take the Next Step With Year-Round Tax Planning
Planning for taxes year-round requires more than simply preparing for filing deadlines. A proactive approach to year-round tax planning can help preserve more of your wealth, improve financial efficiency, and create opportunities to better align your tax strategy with your long-term financial goals. At Sentinel Wealth Partners, we factor tax planning into your broader financial picture so each decision supports a more coordinated strategy.
Interested in starting a conversation? Reach out to us today by calling our office at 703-832-0164, sending an email to brian@sentinelwealthpartners.com, or using our online calendar.
About Brian
Brian Bloxom, CRPC®, ChFEBC℠, is the founder of Sentinel Wealth Partners and a veteran advisor with over 30 years of experience specializing in complex retirement plans and federal benefits. He is dedicated to relieving client anxiety by providing highly accessible, customized guidance that helps retirees and pre-retirees transition confidently into their next chapter. Outside of his practice, Brian serves as the President of his local Salvation Army Advisory Council and enjoys golfing and coaching youth sports.
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Advisory services offered through Cambridge Investment Research Advisors, Inc., a Registered Investment Adviser. Sentinel Wealth Partners and Cambridge are not affiliated. Sentinel Wealth Partners is not engaged in the securities business. Cambridge does not offer tax or legal advice.
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