Taxes. You can’t avoid them—but with careful and strategic planning, you can significantly lower your tax bill and keep more of your hard-earned money. Without a tax plan, you’ll likely miss out on opportunities for tax savings, which can lead to unnecessary financial stress.
The good news? You’re here, so you’re already on the right path to minimizing your tax burden. This blog will explore key tax planning strategies, best practices for optimizing your financial health and avoiding the most common tax planning mistakes.
What is Tax Planning?
First, let’s address the elephant in the room: what does tax planning mean?
Tax planning is the strategic process of organizing financial affairs to minimize tax liability within legal parameters. It is a proactive process that considers your income, expenses, and investments to ensure you don’t pay more than necessary.
Many people believe that tax planning is only for the ultra-wealthy 1%, but the reality is that everyone can benefit from implementing strategic tax practices regardless of income level. Both individuals and businesses implement tax planning strategies to ensure long-term financial health, compliance with tax laws, and reduced stress during tax season.
Tax planning is all about keeping as much of your income as possible while staying on the right side of the law.
6 Tax Planning Strategies To Lower Your Tax Bill
You can’t avoid taxes altogether, but there are several strategies you can implement to keep them at bay. Here are 6 of the most effective tax planning strategies.
1. Deferring Income
Deferring income involves postponing the receipt of taxable income to a future year, which can reduce your tax liability in the current year. By delaying your income, you can defer paying taxes on that income until the following year. For example, you may opt to delay year-end bonuses or choose to receive investment returns at a later date to stay in a lower tax bracket during high income years.
2. Maximizing Deductions
Tax deductions are certain expenses you can subtract from your taxable income. There are two types of deductions: itemized and standard. The standard deduction is a fixed dollar amount that reduces the income on which you’re taxed. For 2024, the standard deduction for couples married filing jointly is $29,200.
Itemized deductions involve listing individual expenses that are deductible under the tax code. Instead of taking the standard deduction, you can itemize if your deductible expenses add up to more than the standard deduction.
Some of the most common itemized deductions include:
- Mortgage interest
- Charitable contributions
- State and local taxes (up to a specific limit)
- Medical expenses (above a certain percentage of your income)
- Casualty and theft losses (in specific situations)
Using itemized deductions when appropriate can further reduce your tax bills.
3. Retirement Account Contributions
There are several ways to save for retirement, but the most tax-efficient options are typically through qualified retirement plans such as a 401(k)/403(b), IRA, or Roth IRA.
Contributions to tax-deferred accounts like a 401(k) or a Traditional IRA are made with pre-tax income, meaning the money you contribute is not included in your annual taxable income. For example, if you earn $80,000 and contribute $10,000 to your 401(k), your taxable income for that year would be reduced to $70,000.
Tax-deferred growth means that money in these accounts grows tax-free until you withdraw it in retirement. You don’t pay taxes on the gains, interest, or dividends as they accumulate.
On the other hand, contributions to a Roth IRA are made with after-tax income, meaning they don’t lower your taxable income today. In retirement, qualified withdrawals from a Roth IRA are tax-free (including any earnings your investments generated). Unlike tax-deferred accounts, Roth IRAs don’t have required minimum distributions (RMDs) in retirement, allowing your savings to grow tax-free if you don’t need to withdraw them.
4. Capital Gains and Loss Harvesting
Capital gains and loss harvesting is a strategy for selling investments to balance gains and losses, reducing your overall tax liability. Tax-loss harvesting can be tricky, but put simply, it’s comprised of 3 steps:
- Sell an underperforming investment
- Use that loss to reduce your taxable capital gains
- Reinvest the money into a different investment that meets your goals
5. Charitable Giving
One of the most influential and rewarding ways to reduce taxable income is charitable giving. Donor-advised funds (DAFs) allow you to contribute to a fund designated for charitable donations, giving you an immediate tax deduction while distributing the funds over time. For those aged 70½ or older, a qualified charitable distribution (QCD) lets you donate directly from your IRA to a charity, reducing taxable income.
6. Family Tax Planning
Proactively planning your family’s future can also bring big tax benefits. If you want to contribute to your child or grandchild’s education, 529 plans can be an excellent educational savings vehicle. Contributions to a 529 plan grow tax-free and offer state tax deductions in many states.
The annual gift tax exclusion allows you to gift up to a certain amount tax-free. For 2024, the annual gift tax exclusion is $18,000, so you can gift your child or grandchildren up to that limit without incurring a taxable gift, making it a valuable tool for tax and estate planning.
4 Common Tax Planning Mistakes To Avoid
The more money you make, the higher your tax liability, and any mistakes can be costly. There are four main tax planning mistakes we see all too often:
- Procrastination: Waiting until April 15th to start tax planning means missing out on year-round strategies that could save money. Tax planning is a 365-day process.
- Overlooking Retirement Contributions: Tax-advantaged accounts can help reduce the taxes you owe, so failing to maximize contributions to 401(k)s, IRAs, or Roth IRAs means losing out on valuable tax savings.
- Misunderstanding Deductions: Should you claim the standard deduction or itemize? If you don’t track your deductible expenses throughout the year, you may miss out on opportunities to reduce your taxable income.
- Ignoring Changes in Tax Law: Tax laws change constantly, so staying informed or working with a professional can prevent costly mistakes and ensure compliance. For example, certain changes from the 2017 Tax Cuts and Jobs Act are set to expire or revert after 2025. Learn more about the 2025 tax law changes here.
Your Secret Weapon To Tax Season: A Financial Planner or Tax Advisor
Taxes can be overwhelming, and if you don’t want to research strategies and tax laws constantly, it’s best to leave it to the professionals. A tax advisor or financial planner can help identify tax-saving opportunities specific to your unique financial situation, goals, and investment profile, ensuring you’re making the most of available tax benefits.
Connect with our team of tax-savvy financial advisors today to review your tax strategy and uncover new opportunities for savings. Get in touch with our team at WDW.