Spring brings a flurry of tax season stress for most individuals and business owners. But in reality, effective tax planning shouldn’t be saved for just one time of year. Tax planning is a year-round process that can minimize liabilities, reduce risk, and uncover new financial opportunities.
Why is Tax Planning Important?
Staying proactive with your income, expenses, and deductions helps avoid surprises come April 15. Additionally, it can also shield you from potential audits or costly penalties. Beyond that, thoughtful tax planning can support larger financial goals, from building wealth to preparing for retirement.
Of course, navigating the ins and outs of tax codes and strategies isn’t always realistic to tackle alone. That’s where our team at Saddock Advisory can help. We offer expert, ongoing guidance that aligns your tax plan with your long-term financial vision.
In the meantime, here are five essential tax planning strategies to help you stay ahead of the curve.
1. Understand Your Tax Bracket
The Progressive Tax System
The U.S. tax system is progressive, meaning the more you earn, the higher the rate you’ll pay — but only on the portion of income within each bracket. For example, if you’re a single filer making $100,000, not all of your income is taxed at the 24% rate. Instead, your income is taxed in layers, with the first portion taxed at 10%, the next at 12%, and so on, up to your highest applicable bracket.
Here are the 2024 federal income tax brackets for single filers and married couples filing jointly:
For a single taxpayer:
- 10% tax for $0 to $11,600
- 12% tax for $11,601 to $47,150
- 22% tax for $47,151 to $100,525
- 24% tax for $100,526 to $191,950
- 32% tax for $191,951 to $243,725
- 35% tax for $243,726 to $609,350
- 37% tax for $609,351 and up
For married couples filing jointly:
- 10% tax for $0 to $23,200
- 12% tax for $23,201 to $94,300
- 22% tax for $94,301 to $201,050
- 24% tax for $201,051 to $383,900
- 32% tax for $383,901 to $487,450
- 35% tax for $487,451 to $731,200
- 37% tax for $731,201 and up
Remember that there are also different amounts for heads of households and complete information can be found on the IRS website.
Why It Matters: Strategic Income Management
Understanding tax brackets can help you make more informed decisions about your income and deductions. For example, if you’re close to the top of a tax bracket, you might consider deferring income — such as year-end bonuses or freelance payments — into the next year to avoid bumping into a higher tax rate.
Similarly, accelerating deductions before year-end — like charitable donations or business expenses — can help reduce your taxable income and keep you within a more favorable bracket. These adjustments can significantly impact your tax liability and create more flexibility in your financial strategy.
2. Maximize Contributions to Tax-Advantaged Accounts
Retirement Accounts
Contributing to accounts like 401(k)s and IRAs offers immediate tax benefits, including potential deductions and long-term perks like tax-deferred growth and reduced taxes in retirement.
Health Savings Accounts (HSAs)
HSAs also have multiple tax advantages, as contributions are tax-deductible, growth is tax-free, and future withdrawals for qualified medical expenses may also be tax-free.
3. Leverage Tax Deductions and Credits
The Difference Between Deductions and Credits
Deductions and credits are two common, often interchangeable terms in the tax realm. However, understanding the differences is key to effective tax planning. Simply put, deductions reduce taxable income, while credits directly reduce the tax owed on your annual returns.
Common Deductions and Credits
When it’s time to file, keep the most common deductions and credits at the forefront of your planning. These include prevalent deductions like mortgage interest, property taxes, and/or charitable donations, as well as common credits like the Earned Income Tax Credit and Child Tax Credit.
4. Implement Tax-Efficient Investment Strategies
Tax-Loss Harvesting
Your investments can play a significant role in your annual tax planning. For example, adopting a tax-loss strategy, where you offset capital gains with capital losses, can reduce taxable income when the timing is optimal.
Holding Period Considerations
Tax planning also entails considering how long you should hold onto your investments, with an eye on the tax implications of short-term versus long-term capital gains and the potential benefits of holding investments for over a year.
5. Plan for Major Life Events
Life Changes and Tax Implications
New milestones will result in noticeable changes to your annual returns and inherently require revisions to your tax strategy. Events like marriage, having children, or buying a home can significantly affect tax situations, so you must review and revise your tax plan accordingly.
Estate Planning
It’s never too early to start estate planning with an eye toward how the schematics of your wills and trusts may financially impact your loved ones. An expert like Saddock Advisory can help with this essential component of lifelong tax planning to ensure tax-efficient wealth transfer and minimize estate taxes.
Don’t Go it Alone – Let Saddock Advisory Guide Your Tax Planning Strategy
Above all else, the smartest move you can make when it comes to tax planning is to work with an expert.
Reach out to the experienced and client-focused team at Saddock Advisory today and find relief and financial opportunities during the current tax season and for many more tax seasons to come.
