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Discover the Advantages of Year-round Tax Planning

By May 15, 2022May 16th, 2022No Comments

April has come and gone, and, assuming you’ve filed your taxes on time, you can forget about the IRS for a whole year, right? Actually, to effectively preserve and build your wealth, we recommend year-round tax planning. Consider the following strategies.

Estimate Your Tax Liabilities

To the extent possible and while you have time to prepare, figure out what you’re likely to owe, whether you file quarterly or annually. Account for earned income, capital gains and required minimum distributions (RMDs) from certain retirement accounts. Remember that if you plan to convert a traditional IRA to a Roth IRA, the amount converted is taxable in the year of the conversion. If you run your own business, set aside funds and pay estimated quarterly taxes throughout the year. Your accountant and wealth advisor can help you project and prepare for tax liabilities well ahead of tax season.

Adjust Your Tax Withholding

Getting a big refund from the IRS every year isn’t a good thing; it’s a sign your employer is withholding too much tax. You can fix that by claiming more allowances on your W-4. The goal: Avoid consistently large income tax refunds but preclude the need to write a big check. Optimally, you want to break even or get a small refund. Your money should be available to put to work, not sitting in an IRS account for several months.

Reduce Your Taxable Income

Minimizing your taxable income is a straightforward way to curb your tax bill. A great way to start: fully funding a 401(k), 403(b) plan or traditional IRA with pre-tax dollars. Uncle Sam will charge income tax once you start taking distributions from these accounts in your retirement years. But until then, your money will have the opportunity to compound tax free.

Go One Better Than Tax Deferral

On the other hand, contributions to certain kinds of accounts aren’t subject to taxes. When you fund a health savings account, for example, the money goes in (reducing your taxable income), potentially grows, and comes out tax free if used for qualified medical expenses. When you retire, you can use those HSA savings for a range of qualified health care expenses, including Medicare premiums, deductibles, co-pays and co-insurance, qualified long-term care insurance premiums, and dental and vision expenses.

Flexible spending accounts (FSAs) and dependent care FSAs are also tax free when used for eligible medical expenses; however, those funds have to be depleted annually so don’t have the extended usage that HSAs have.

Contributing to 529 college savings plans in a tax-advantaged way can also benefit your bottom line. Note that 529 plan contributions grow federally tax free and earnings are not subject to federal income tax when withdrawn for qualified education expenses. Most states that have an income tax allow either a deduction from income or a state tax credit for 529 plan contributions when reporting income for state tax purposes. However, not all states follow the federal tax treatment of K-12 tuition or student loan expenses.

Minimize Your Capital Gains Tax

The federal tax on capital gains can trim up to 20% of the profit from your sale of appreciated assets, so finding ways to defer, reduce or offset such gains can really pay off. If you plan to sell a business, real estate holding or other significant asset this year, consider structuring the deal to take place over two years. Another strategy is to transfer your appreciated asset to your adult child, who may be in a lower capital gains tax bracket than you.

Do Well by Doing Good

A sure way to avoid capital gains tax entirely is to donate appreciated assets to a charity. Neither the donor nor the recipient owes taxes on such gifts, and donors are typically entitled to a tax deduction based on an asset’s fair market value. Be aware that you’ll have to itemize donations for the IRS—and they’ll need to add up to more than the current standard deduction ($25,900 for joint filers for the 2022 tax year1) for the strategy to make sense. One approach is to use a “bunching” strategy—replacing multiple years of smaller donations with one large donation in a single tax year. If you make a bunched donation to a donor-advised fund, you can instruct the fund to disburse the gift to a charity of your choice over several years.

Another Charitable Giving Strategy

Taxpayers taking RMDs know that the IRS treats these distributions as income. By funneling some or all of your RMDs to charity, in the form of qualified charitable contributions (QCDs), you’ll reduce your taxable income while earning a potential tax deduction.

Don’t Waste Those Losses

The tax code lets taxpayers lower their tax bill by using capital losses to offset capital gains. Thus, a loss on Stock A can be used to offset a gain on Stock B, lowering or eliminating the capital gains tax liability. While tax-loss harvesting has traditionally been a year-end activity, your financial advisor can point out opportunities that arise throughout the year.

Heading Off Estate Taxes

When it comes to taxes, it’s always smart to think more than one year ahead. That’s especially true for families that may ultimately face estate taxes. The current lifetime exemption for gift and estate taxes is $24.12 million2 for married couples filing jointly. To help stay below that threshold, consider taking full advantage of gifting strategies: The IRS allows couples to gift up to $32,000 per year, per recipient, tax free.2

Seeing the Big Picture

It would be nice if we only had to think about taxes once a year. But minimizing them, which is so important for protecting and growing wealth, requires vigilance. Your advisor will work with your tax professional to advise you on year-round tax strategies as part of your overall wealth plan.


1“IRS Provides Tax Inflation Adjustments for 2022”

2“What’s New – Estate and Gift Tax”