Tax planning is not just a one-time-per-year thing. Having a year-round plan can help you reduce your tax liabilities when April rolls around. Being as proactive as possible can help you make the most of your benefits and reduce any unwanted surprises.
Here are six tips to plan for tax season year-round.
1. Find Ways To Reduce Income Tax
The easiest way to do this is to reduce taxable income. You can defer your tax liability when making qualifying contribution to specific financial vehicles, such as:
- Retirement accounts and plans
- FSAs and DCFSAs
- 529 plans
2. Minimize Capital Gains Tax On Investment
A capital gain is when you sell something for more than what you spent on it. A good example of this is stocks or cryptocurrency. The federal government will charge you for this profit called “capital gains taxes”. There are several ways you can reduce these charges, including:
- Spread your sale over two years
- Transfer any appreciated assets to your children since they are in a lower tax bracket.
- Transfer appreciate assets to charity to claim deduction on the fair market value.
- Capitalize on tax loss harvesting.
- Invest your gains in Opportunity Zone funds, reducing taxes you owe.
3. Do An Income Tax Projection To Prevent Surprises At Tax Time.
One of the most important steps to take is to figure out where your taxes are before it is too late. Having a projection of your potential income will surely give you more time to prepare and plan effectively for the upcoming tax season.
4. Re-think Your Charitable Donations
Tax deductible donations can significantly reduce your taxable income. You will need to itemize your deductions at tax time to claim your charitable donation. However, the current deduction may have you rethinking charitable donation.
You may want to use a “bunching” strategy to increase your savings. Bunching has you replace several years of smaller donations with a large donation in a single tax year. This allows you to itemize your deduction and claim the tax benefit.
5. Utilize Current Gift And Estate Tax Rates
Make of the most of annual gift tax exclusion which is the money you are able to gift to an individual per year, tax free. You are able to transfer $16,000 to an individual each year without any gift tax implication. A couple is able to collectively gift up to $32,000 to an individual each year.
6. Work With A Trustworthy Financial Professional
Having a financial professional you can trust can help you see the many aspects of your finances and can work with you to work towards your goals. They will be able to answer any and all questions you may have, working towards setting you up for financial success.