For many people, tax planning is something that only comes to mind when it’s time to file a return. In reality, the most effective approach treats tax planning as a continuous, year-round practice. Incorporating tax-saving strategies into your financial decisions throughout the year can reduce your tax liability, help you take advantage of financial opportunities, and strengthen your overall financial well-being.
In this article, we explore why year-round tax planning is essential and provide practical tips for weaving proactive tax strategies into your everyday financial routine.
Why Year-Round Tax Planning Matters
There are several upsides to tax planning throughout the year, including:
- Reducing time pressure and stress during tax prep season
- Avoiding missing certain year-end deadlines
- Allows for maximizing contribution limits
- Helps provide planning for available deductions to reduce taxable income
Tips for Year-Round Tax Planning
While it may seem daunting to plan for taxes year-round, it doesn’t have to be. Here are some easy ways to develop good tax-planning habits all year long.
Optimize the Use of Tax-Advantaged Accounts
Traditional IRAs, Roth IRAs, 401(k)/403(b) retirement accounts, and health savings accounts (HSAs) are all effective, tax-friendly ways of both saving for the future and potentially reducing your tax liability at year-end. If you can, create a financial habit to contribute regularly to such accounts, reducing taxable income (where applicable), and increasing tax-deferred savings for your future.
Deferring Income
As your income increases throughout your working years, deferring part of that higher income in pre-tax retirement accounts offers both a current tax deduction and opportunities to grow your savings for the future. One effective strategy is to confirm payroll deductions to your 401(k) account maximizes any employer-match contributions, if offered.
Some larger employers may offer "deferred compensation" programs to executives and key employees. By deferring some of your income to such a program, you might lower both your tax bracket and your overall tax liability each year, since you are only taxed on this deferred income when withdrawn in retirement. Working with a financial advisor can help balance the benefits of deferring income against current cash flow needs and future tax and expense expectations.
Accelerating Income
During lower-income years, such as early retirement or during a job transition or layoff, consider strategies to accelerate or aggregate tax liabilities. For example, a full or partial conversion of traditional IRA accounts into an after-tax Roth IRA are effective in taking advantage of a temporary lower tax bracket situation, allowing for more tax-free growth of retirement assets.
Taking Required Minimum Distributions (RMDs)
Once you reach age 73 (if you were born between 1951-1959) or age 75 (for those born in 1960 or later), you’re required to take RMDs from traditional retirement accounts like IRAs and 401(k)s. These withdrawals are subject to income tax, and missing them can result in hefty penalties. Managing RMDs effectively requires looking ahead to determine how they might impact other income sources and trigger additional taxes or higher Medicare premiums. Strategies to lower the impact of RMD income include Roth IRA conversions and directing excess RMD income to charitable causes, where the charitable deduction offsets the taxable distribution.
Tax-Loss Harvesting
If you hold investments in taxable (non-retirement) accounts, tax-loss harvesting can be a valuable strategy to offset capital gains by selling select investments at a loss. These losses can help to both offset otherwise taxable investment gains and are deductible to some degree against other ordinary income. It’s essential to be aware of the wash-sale rule, which prevents repurchasing substantially identical securities within 30 days of the sale, ensuring the tax loss is valid.
Bunching Deductions
Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chances of your total itemized deductions exceeding the standard deduction amount and you thereby have a larger deduction against income, leading to more significant tax savings.
For example, instead of donating $1,000 to your favorite nonprofit each year, you might donate $10,000 in one year, allowing you to itemize in that year and potentially benefit more from the deduction. Bunching can apply to other expenses as well, such as medical expenses and business expenses. Just be mindful of certain caps or limitations on deductions, so you can take full advantage of this strategy.
Keep Thorough Records
Pay stubs and receipts shouldn’t be kept in a shoebox. It’s important to know how much you made during the year and how much you’ve spent on items that qualify for tax deductions. Technology is on your side here. Various apps and software can help you keep track of deductible expenses and can automatically organize and track your budget.
Maintain Receipts for Deductions and Credits
Maintain records of out-of-pocket business expenses, mileage for business purposes, charitable contributions, and educational costs. If you are self-employed and use a home office, track home utility costs to take full advantage of a home office deduction. All these expenses are potentially deductible and having this information already available makes tax prep much easier.
Modify Your Withholding and Estimated Payments
If you are a W-2 employee, after each tax season, check your federal/state tax withholding to confirm it matches your anticipated tax liability for the coming year. If you are self-employed, accurately paying estimated quarterly taxes can help to avoid underpayment penalties or large tax surprises when you file each year.
Get Ready for Filing Early
Know in advance the types of tax documents you’ll need to file your return and start collecting them as soon as available. These include W-2 tax forms, 1099 income statements, 1099R distribution forms, and 1095-A medical insurance statements. You don’t have to wait until the last minute!
Some IRA’s have contribution limitations and tax consequences for early withdrawals. For complete details, consult your tax advisor or attorney. Distributions from traditional IRA’s and employer sponsored retirement plans are taxed as ordinary income and, if taken prior to reaching age 59 ½, may be subject to an additional 10% IRS tax penalty. Converting from a traditional IRA to a Roth IRA is a taxable event. A Roth IRA offers tax free withdrawals on taxable contributions. To qualify for the tax-free and penalty-free withdrawal or earnings, a Roth IRA must be in place for at least five tax years, and the distribution must take place after age 59 ½ or due to death, disability, or a first time home purchase (up to a $10,000 lifetime maximum). Depending on state law, Roth IRA distributions may be subject to state taxes.
Partner With a Professional for Year-Round Tax Planning
Year-round tax planning allows you to be strategic, proactive, and intentional with your money all year long. It helps you retain more of what you earn, uncover opportunities to grow your wealth efficiently, and keep every financial decision supporting your long-term objectives.
At Wilkinson Wealth Management, we integrate tax strategies directly into your comprehensive financial plan, so your investments, retirement planning, and legacy goals all work in harmony to enhance your financial potential. Reach out to us at 434-202-2521 or use our Contact Us page to schedule an appointment.
About Dustin
Dustin Ciraco is a financial advisor and has been working for Wilkinson Wealth Management since 2022. He moved to Charlottesville in 2018, when he accepted a position at the University of Virginia as the Financial Education Coordinator in Student Financial Services. He has a BS in Sports Management with a minor in Business Administration from the University of Florida (Go Gators!) and is a CERTIFIED FINANCIAL PLANNER® professional.
Dustin is married to his lovely wife, Lauren. Together they have a dog, Luna, that they enjoy taking on adventures as a family.
This article was prepared for Dustin Ciraco’s use.