For Best Tax Savings, Year-Round Tax Planning Is Essential

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It’s commonplace to focus on tax savings in early spring as Tax Day approaches in mid-April, but how often do you think about them otherwise? If your answer is “not much,” consider making a change. After all, the ultimate goal in tax planning is to minimize taxes paid over your lifetime — not just on your current tax bill — and to foster overall growth and preservation of your assets.

Tax planning is therefore most effective when it’s ongoing throughout the year. If you work with a financial adviser, be sure to keep tax savings top of mind during your discussions. Numerous strategies can be employed to achieve long-term tax reduction. Let’s review them here.

Tax-advantaged retirement plans. Are you choosing the plan that’s best for you, considering your age, employment status, income level, etc.? Some of the most common retirement plans are 401(k)s, 403(b)s, SEPs/SIMPLEs and IRAs.

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Many of these plans will often have both traditional (pre-tax) and Roth (post-tax) contribution options. Other retirement plans include non-tax-deductible traditional IRA contributions and the self-employed Solo/Individual 401(k).

Roth conversion. Do you have relatively lower income this year? If so, it may be the perfect opportunity to convert pre-tax dollars to Roth dollars, which will grow and be distributed tax-free. Even if your income level is above the maximum limit for a Roth contribution, you can still do a backdoor Roth conversion.

Health savings account (HSA) and flexible spending account (FSA). Does your employer offer one or both of these tax-advantaged savings options, and do you know the difference between an HSA and an FSA?

These accounts will help you save on FICA (Social Security and Medicare) taxes, and one is even triple-tax-advantaged! (Learn more about HSAs in the article HSAs Make Health Care More Affordable and FSAs in the article Still Have FSA Money to Spend?)

Tax-loss harvesting. Has your portfolio been proactively reviewed for opportunities to recognize capital losses? These losses can offset other investment gains and can be used to reduce your ordinary income by up to $3,000.

Capital losses carry over year to year until completely used versus gains. (Learn more about tax-loss harvesting in the article Capital Losses: Rules to Know for Tax Loss Harvesting.)

Qualified tuition programs. Are you contributing to your state’s 529 plan? Most states offer a deduction on your state tax return for these contributions, and your contributions will grow and be distributed tax-free when used for qualifying education expenses.

Also, the SECURE 2.0 Act of 2022 enables 529s to now be rolled into beneficiaries’ Roth IRAs up to $35,000.

Charitable giving. Are you maximizing the tax benefits of your charitable contributions? Have you considered contributing to a donor-advised fund, bunching your contributions into a single tax year or donating appreciated stock in order to both avoid capital gains taxes and receive a charitable deduction? (Learn more about qualified charitable contributions in the article When RMDs Loom Large, QCDs Offer a Gratifying Tax Break.)

Sequence of withdrawals in retirement. Are you withdrawing from your investment accounts in the most tax-efficient order and proportions? How you structure your retirement withdrawals can have a large impact on the long-term value of your portfolio.

Estate planning. When did you last review your estate plan? Given the recent changes in tax law, is it still most effectively structured to minimize or eliminate your overall estate tax liability? Both state and federal estate tax laws need to be considered.

Tax law changes. Are you remaining current with the ever-changing tax laws and regulations, e.g., deadlines, maximum contributions, necessary forms and documents and new legislation such as the SECURE 2.0 Act? Keeping up to date on such information is key to optimizing your tax situation in any given year.

Exploring these strategies with a financial adviser throughout the year — and including your accountant in your discussions — will help you maximize your tax planning and preparation not only for your annual tax returns but for future ones as well.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Andy Leung is a vice president and private wealth adviser at Procyon Partners, an independent RIA in Shelton, CT. With more than 20 years of experience serving institutional clients for UBS Investment Bank, Andy has extensive knowledge of the global markets. Additionally, as a franchisee of a boutique fitness operation, Andy has an acute understanding of the financial issues and challenges associated with franchising and small business ownership.