Nobody likes taxes and, almost universally, everyone would prefer to give less of their money to the IRS each year. However, while saving on taxes is a win for pretty much everyone, some people will find a greater benefit in tax planning than others.
Tax planning involves making use of the tax laws in place to pay less in taxes. This is called "tax avoidance" (which is legal) and is not to be confused with "tax evasion" (which is illegal). For example, contributing earned income to a Traditional IRA is a way to avoid current year taxes (legal), while lying about your income is a way to evade taxes (illegal).
So who can benefit the most from tax planning? Here's a list of scenarios where tax planning is especially helpful and you should consider working with a financial planner in conjunction with your CPA:
You are near the upper or lower range of your tax bracket: the U.S. operates on a progressive income tax code, meaning that you pay more in taxes as income increases. But the way our tax brackets work means that not every dollar is taxed the same: income within certain thresholds is taxed at one rate, income above that threshold is taxed at a higher rate, and so on. (You can see the 2024 tax brackets here.) Here's an example: let's say that you are a single person earning $100,000 in 2024. The first $11,600 of income is taxed at a 10% rate, income between $11,601-$47,150 is taxed at 12%, and income between $47,151-$100,525 is taxed at 22%. Notice that if your income increases by just $525, every dollar after that would be taxed at a higher rate because it bumps you into the next tax bracket. Likewise, if you made just above $100,525 in 2024, you would also see an outsized benefit by reducing taxable income to below that threshold so that none of your money gets taxed at the higher rate.
You anticipate earning significantly more or less than in previous years: again: no one likes paying taxes. But there are situations when it is more or less advantageous to have taxable events. If you anticipate making more money than normal, tax-deferred accounts like 401(k)s, IRAs, and HSAs are great for reducing taxable income (and thus taxed owed). If you anticipate making significantly less money than last year, this could be a great time to consider triggering some taxable events like selling investments with a lot of gains (capital gains are taxable) or converting money in a Traditional IRA to a Roth IRA (taking money out of a Traditional IRA is always taxable). Knowing what to do for your specific situation can be complicated, so this is a great reason to speak with a financial planner about best next steps.
You receive a one-time financial windfall: what if your earned income stays the same, but you also sell a property this year? Even though long-term capital gains from a property sale are taxed differently than ordinary income, profits from that sale can still bump you into a higher tax bracket – meaning that your earned income ends up getting taxed more than normal. Or what if you receive a sizable inheritance? While receiving inherited assets is not a taxable event, that doesn't mean you shouldn't pay attention to tax implications. Inherited IRAs, for example, have their own rules about when money needs to be distributed (which is taxable). And, while most inherited assets get a tax reset (in technical terms, the basis gets adjusted to value at the date of death, rather than the date of purchase) assets received from a trust do not get the same beneficial treatment. That means you could have huge tax consequences if you decide to sell assets received from a trust.
You are approaching or just started retirement: most people are in peak earning years just before they retire, which also means that most people's incomes drop noticeably just after retirement. Through tax planning, you can make sure that certain decisions are made at the right time – and in the right amount – to stretch your retirement money as far as possible. Furthermore, depending on your circumstances it may be advantageous to start or delay Social Security benefits to balance the monthly amount received against other taxable events. It's no wonder that just before and after retirement are some of the most common times that people work with financial advisors.
Want to learn more about tax planning opportunities for your specific situation? Drop me a line. Thanks!
Timothy Iseler, CFP®
Founder & Lead Advisor
Iseler Financial, LLC | Durham NC | (919) 666-7604
Iseler Financial helps creative professionals remove stress while taking control of their financial lives. We'll help identify your current strengths and weaknesses, clarify and refine your long-term goals, and prioritize decisions to improve your financial well-being now and later. Reach out today to take the first step.
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