Whenever the topic of taxes comes up, it’s typically to discuss how to get out of paying them. When people earn money, it’s usually with the intent to spend it on their happiness, not to give it to the government.
Unfortunately, it is a common occurrence that folks are only interested in talking about taxes near tax season. Because of this, a conversation with an advisor often turns into a tax mitigation triage, looking for a way to throw a couple of thousand dollars somewhere at the last minute.
However, if you don’t want to get taken to the cleaner in April, it is necessary to plan for taxes all year long. Here is a rundown of why year-round tax preparation is important, and what you can do to start right now.
The Real Tax Day
Bill got a new job in February in his chosen career. During onboarding, he calculated what his income was going to be for the year, following the IRS guide carefully.
Bill performed his job excellently until September, and he was promoted to manager. He also received a significant raise. Little did he realize, he had entered a new tax bracket. Because he didn’t make any changes to his tax plan, Bill will have a hefty tax bill for the year.
It’s unwise to only evaluate your taxes at tax time because your tax situation is constantly open to change. Too often taxpayers fall into the mindset that they pay taxes once a year. The truth is that you pay taxes every single day; April is just when everyone checks for mistakes, either overpayments or underpayments throughout the year.
You need to evolve your strategy and increase or decrease your tax reduction tactics depending on the changes in your day-to-day life. If your income goes up, so should your retirement savings. If you lose your primary job and start a part-time side hustle, you may need to stop any withholdings until you get back on your feet.
Most comprehensive tax mitigation plans simply won’t work unless you implement them throughout the whole year. Here are a few that you can begin to implement now to keep the taxman at bay.
Winning At Taxes
One incredible tax reduction strategy for your current income year is a pre-tax retirement savings account. 401(k)s, 403(b)s, and simple IRAs are different examples of pre-tax plans. Designed to encourage retirement saving, they send your tax liability down the road into retirement. This allows you to avoid paying taxes on the money you put into savings during this tax year and pay the taxes on your withdrawals during retirement instead.
But this strategy works best when planned carefully throughout the year. You typically have to contribute to employer-provided 401(k)s as a portion of your regular paycheck. You can’t wait until the end of the year and try to play catch-up. A simple IRA may allow you to make a lump-sum payment before taxes are due. But if you haven’t been planning and depositing throughout the year, the odds of you having an extra pile of cash are not going to be high.
Similar to 401(k)s, contributions to an HSA are pre-tax and may help lower the current year’s tax bills. HSAs are savings plans designed to aid people with high-deductible health insurance. As long as the contributions that you make are only spent on medical expenses, they will never be taxed. Just remember, to fully take advantage of the tax benefits of an HSA, you must make deposits from your paycheck, just like with a 401(k).
Charitable contributions are another great way to reduce your tax liability this year. Donating to a qualified recipient doesn’t give you back a dollar-for-dollar return, but it does reduce your income tax liability in the form of a deduction.
If you are going to have to pay an arm and a leg to the IRS, why not give a slice to your community instead?
It should be noted that winning at taxes doesn’t always mean using pre-tax savings plans to defer your taxes down the road. The idea of wealth management is to grow wealth, which is probably what you are planning to do. If you only focus on saving tax money today, you might end up paying more in the future when you start to use the assets you’ve accumulated.
For example, suppose that you expect to make $150,000 per year as income during your working years. However, if you expect an annual withdrawal of $300,000 from retirement, waiting to pay your taxes until later might not make sense. In situations like these, it probably makes more sense to pay the taxes now but invest in post-tax savings like a Roth IRA.
Roth IRAs and Roth 401(k)s offer retirement savings where you pay your taxes now on your income but all of the growth from your savings will be tax-free on withdrawal. If you have multiple millions of dollars in growth at the time you begin taking money out for retirement, you will likely pay a lot less in taxes by going with a Roth.
Back in 2014, there were reportedly 2,652 pages of tax law and nearly 70,000 pages of supporting documents. It’s much longer now, though no one can seem to agree how long. But even if you managed to memorize every word of it, it wouldn’t advise you on which tax strategy is best for your unique, personal situation.
If you don’t want to miss out on taking full advantage of all of the tax reduction strategies available to you, then you need a team of experts on your side. Beacon Wealth Management has helped many people just like you navigate tax planning, and we can help you too!
John Halterman, best-selling author and nationally published blogger has been featured as a financial guest expert on the TV shows of self-help gurus Brian Tracy and Jack Canfield, author of Chicken Soup for the Soul. He has appeared on ABC, FOX, BRAVO, NBC, CBS, and A&E. John is the expert host of the weekly WDTV News 5 segment, “Solutions 4 Financial Independence.”
As an authority on wealth management, he has been invited by hundreds of institutions such as universities, federal agencies, professional associations, and large energy and utility corporations to be a guest speaker and educational event host. Event topics include maximizing your retirement, managing down market investment risk, how to reduce your tax burden, and transferring your family wealth in the most tax advantageous way.
John is the founder and owner of Beacon Wealth Management, specializing in helping entrepreneurs, professional practitioners, and retirees overcome the 4 major challenges facing successful families. He is a warm communicator with a passion for helping people transform their financial futures. John understands the multifaceted set of financial worries people face as they become more successful and enter the retirement red zone. He empathizes personally with each client and delivers a collaborative client experience that empowers people to reach their life goals.
With more than two decades of experience, John’s professional credentials include:
- Certified Wealth Strategist (CWS)
- Accredited Investment Fiduciary® (AIF®)
- Certified Estate Planner™ (CEP®)
- Chartered Federal Employee Benefits Consultant℠ (ChFEBC℠)
- Professional Plan Consultant® (PPC®)
- Registered Financial Consultant (RFC)
- Past member of Ed Slott’s Master Elite IRA Study Group
A native of Weston, West Virginia, John served in the United States Air Force before becoming a Wealth Advisor. Today, he resides with his family in Bridgeport, West Virginia. He and his wife, Lisa, have been married since 2005 and have three amazing children. A family-loving man, he enjoys giving back to his community, coaching youth sports, landscaping and architectural design, WV Athletics, and is an outdoor and racquetball playing enthusiast.