Most people have experienced the process of gathering their tax information. The software, or tax preparer, then tells you how much you get back as a refund or what you must pay. This is just done retroactively. However, when tax planning is done proactively, it can make a world of difference now and in the future.
The main idea of tax planning is to protect your hard-earned money. You don’t want to work hard just to see it slip through your fingers. American broadcaster, Arthur Godfrey, said, “I’m proud to pay taxes in the United States; the only thing is, I could be just as proud for half the money.” We should all pay our fair share of taxes, but we shouldn’t give our money away unintentionally. The purpose of money is first to provide security, then independence and freedom. Don’t sacrifice your security because you didn’t take the time to do proper tax planning. Here are some potential ways that tax planning can benefit you:
Tax-loss harvesting: selling assets that have losses in order to offset the sale of assets with commensurate gains, thus reducing tax liability. This can help keep you from going into a higher tax bracket or from paying extra Social Security or Medicare taxes.
401(k) contributions: Many people are underfunding their retirement plans (401(k)s, IRAs, Roth IRAs, etc.) and could either lower their tax bracket with pre-tax contributions or reduce future tax liability with Roth contributions. Contributing to your retirement plan is creating future security.
Roth contribution or conversion: Choosing to pay taxes now can help you avoid paying taxes in the future. If you believe your taxes will go up in the future, a Roth contribution or conversion is something you should consider.
Qualified Charitable Distributions: If you are over age 70 1/2, you can donate directly to a charity from your IRA and avoid paying any taxes on the distribution.
Social Security tax: Many people mistakenly believe they don’t have to pay taxes on Social Security. Surprise! Up to 85% of it may be subject to tax. However, there are ways to reduce how much Social Security is subject to tax by reducing income. In one case, we were able to reduce income to the point where the client didn’t have to pay any taxes, saving them approximately $500 per month without reducing their monthly income.
These are only a few ways to potentially save yourself thousands of dollars of hard-earned money. More importantly, these strategies can help you increase your feelings of security, independence, and freedom, now and in the future. If you wonder if you can benefit, contact one of our Private Wealth Managers for a tax planning session or contact a qualified CPA for tax advice.
*SFS does not offer tax advice nor prepare tax returns.
