With just over half of all tax paying Americans believing they pay too much in taxes, a topic like protecting your wealth from the IRS is of great interest.
The question is: Can you really protect your wealth by proactively planning your tax liability and putting long-term strategies in place? Or are you at the mercy of the tax system, eating into your wealth year by year?
Proactive planning is about much more than discussing tax credits and federal tax withholding. It’s about defending your wealth against unnecessary tax liability and investing it into your future. With a progressive tax system in the U.S. where larger incomes face higher marginal tax rates, small changes can help you reduce your tax burden.
Here, we will outline actionable tax planning strategies across a 12-month timeline, helping you organize your taxes strategically and reduce your taxable income.
Whether you’ll tackle federal tax withholding, deduct eligible medical and dental expenses, or navigate through mutual funds and capital gains, these steps will guide you through the next tax year.
Month 1-3: Laying the foundation
In the first quarter of the year, focus on understanding your current financial situation. This time period usually coincides with tax season, so you have plenty of opportunity to review your situation when you complete your federal income tax return.
1. Review your average income tax rate and adjust your federal withholding
The U.S. federal income tax system includes seven tax brackets, with rates ranging from 10% to 37%, based on your taxable income. To avoid surprises at tax time, review your paycheck carefully to ensure that federal tax withholding or estimated payments are accurately calculated by your employer. Additionally, verify that your filing status is correct, as it directly affects the income thresholds for each tax bracket. Use IRS Form W-4 to make adjustments.
2. Review retirement contributions
Contributing to tax-advantaged accounts like 401(k)s and IRAs can help reduce your taxable income while preparing for the future.
2024 contribution limits:
- 401(k), 403(b), and Most 457 Plans
The maximum contribution limit has risen to $23,000, up from $22,500 in 2023.
Employees aged 50 or older can contribute an additional $7,500, bringing the total possible contribution to $30,500.
- Traditional and Roth IRAs:
The contribution limit is now $7,000, up from $6,500 in 2023.
The catch-up contribution for individuals aged 50 or older remains at $1,000, now adjusted annually under the SECURE 2.0 Act.
3. Deduct eligible expenses
Organize receipts and property tax documentation for state and local taxes or medical and dental expenses. Put a tracking system in place for collecting and organizing these expenses throughout the year.
Month 4-6: Plan for greater tax savings
1. Open a health savings account (HSA)
If you’re eligible, an HSA offers a triple tax benefit: tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified expenses.
- Contribution Limits:
Individual: $4,300
Family: $8,550 [1]
2. Utilize all possible tax credits
Research and claim credits like the Child Tax Credit, Lifetime Learning Credit, or the Earned Income Tax Credit to reduce your tax bill.
Tax credits are provisions in the tax code designed to reduce your tax liability, directly decreasing the amount of tax you owe on a dollar-for-dollar basis. Unlike deductions, which lower your taxable income, tax credits directly reduce your tax bill and can sometimes result in a refund.
Types of tax credits
Refundable tax credits: This can reduce your tax liability to below zero, resulting in a refund. If the credit exceeds the amount of taxes owed, the excess is refunded to you.
Non-refundable tax credits: These credits can reduce your taxes to zero, but not below. Therefore, you will not get a refund on these credits.
Partially refundable tax credits: As the name implies, a portion of the credit is refundable.
A number of credits are available to individuals. These credits can form part of your yearly tax strategies, but it is advisable to consult a financial advisor or tax professional if you are unsure about whether you are eligible for these credits. Claiming credits that you are not eligible for, can result in a penalty. Ask your advisor about the Earned Income Tax Credit, Child Tax Credit, Lifetime Learning Credit, and the Saver’s Credit.
Hall Accounting Company is a CPA accounting firm in Dallas that specializes in helping individuals manage their wealth through tax planning and investment opportunities. Schedule your free consultation with them today, their senior tax associates have a number of strategies they can assist you with.
3. Begin tax-loss harvesting
Tax-loss harvesting helps investors reduce taxes by offsetting the amount they have to claim as capital gains or income. Basically, you “harvest” investments to sell at a loss, then use that loss to lower or even eliminate the taxes you have to pay on gains you made during the year.
Tax-loss harvesting only applies to investments held in taxable accounts and is not financially fruitful if you are in a lower tax bracket. You need to complete all of your harvesting before the end of the calendar year, Dec. 31.
Month 7-9: Start preparing for year-end savings
As the year progresses, it’s time to align your tax planning strategy with upcoming tax deadlines.
1. Adjust income and expenses
This is the time to calculate estimated tax payments while you still have time to do something about it. Do a pro-rata calculation of your adjusted gross income, and then make any adjustments necessary to offset paying high income taxes. You can also begin focusing on any property taxes that must be paid and preparing eligible deductions.
If you’ve made a substantial income by this time, you’ll need to adjust certain tax strategies quickly to reduce your taxable income. This can involve charitable contributions, such as a donor advised fund.
2. Contribute to a donor-advised fund (DAF)
When you contribute to a DAF, you can take a charitable tax deduction for the year of the contribution, even if you distribute the funds to charities in later years. Contributions may include cash, stocks, mutual funds, or other appreciated assets, providing opportunities to offset realized capital gains.
Donations of long-term appreciated assets, like stocks, are deductible up to 30% of AGI, based on their fair market value, while avoiding capital gains taxes. This strategy offers an immediate tax deduction.
3. Max out retirement and HSA contributions
If you still have a large tax bill after contributing to a donor-advised fund, then you can max out your retirement and HSA contributions, if you haven't already done so. Think of it this way: You can either pay taxes or give yourself the benefit of the extra income you’ve earned.
Month 10-12: Closing off the year strong
Having applied tax reduction strategies systematically throughout the year, you are now ready to begin preparing for tax filing season. By this time, you should have worked through the following strategies:
Scrutinized your withholding amount, your tax type, and the tax bracket you fall in.
Put the maximum amount of money into your retirement account or IRA.
Gather all deductible expenses - ensuring they are allowable expenses.
Satisfied yourself with all the tax credits you are eligible to claim.
Consider tax-loss harvesting if you earn a significant income.
Worked out your estimated tax payments and made adjustments to further reduce tax liability.
Contributed to a donor-advised fund (if necessary)
Gathered all your documentation together, including those applicable to property taxes.
What has been outlined here are just some of the strategies you can employ to reduce your tax bill. Tax planning can be a complex process because every situation is different, and changing tax laws is the most difficult part of the process to keep ahead of.
But there are professionals who make this their daily bread and butter to help you create tax saving opportunities. Hall Accounting Company is one such company. We have many years of experience in applying lucrative tax strategies and would be happy to work out a unique plan that matches your financial needs. Call us today.
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