7 essential tax planning tips

Tax planning isn’t a once-a-year activity. Whether you’re aiming to maximize deductions, defer income or make smart investment decisions, proactive planning may help you minimize your tax liability and keep more of your hard-earned money.

Many people scramble in April, but the most effective strategies unfold months in advance. Here are seven tax planning tips to help you optimize your tax situation and a checklist to keep you on track. 

7 essential tax planning tips

1. Check your paycheck withholdings at the beginning of each year.

An incorrect W-4 can result in an unexpected refund or a surprise tax bill. While a large refund feels good, it is essentially an interest-free loan to the government.

Use the IRS Tax Withholding Estimator to find out if you’ve been withholding the right amount or to calculate your desired refund amount. If you need to make adjustments, file a new Form W-4 at your workplace that includes the added or subtracted withholding amount provided by the estimator.

This is a good time to confirm your state income tax withholding information (if applicable) as well.

2. Make contributions to investment and spending accounts throughout the year.

One of the most effective ways to lower your tax bill is to reduce your taxable income. You can defer taxes or eliminate them entirely when you make qualifying contributions to specific financial vehicles.

Retirement accounts

You can make tax-deductible contributions to a 401(k) plan, 403(b) plan or traditional IRA. Plus, the amount you can contribute each year increases if you’re 50 and older.

529 plans for education

A 529 plan allows you to make contributions while enjoying tax-free earnings and withdrawals for approved educational expenses.

HSAs and FSAs

Health savings accounts (HSAs) give you the triple tax benefit of tax-deductible contributions, tax-free earnings and tax-free withdrawals for qualified medical expenses.

Flexible spending accounts (FSA) and Dependent Care FSAs (DCFSA) let you bypass taxes to save for healthcare costs and dependent care, respectively. Depending on the plan, you may need to use the funds in these accounts within the calendar year or shortly thereafter.

Key insight: All 401(k) contributions must be made by December 31. You can make contributions to IRAs and HSAs up to the tax filing deadline each year.

3. Consider a Roth IRA conversion before December 31.

While eligibility to open and contribute to a Roth IRA is based on income level, you can convert some or all the assets in a traditional IRA or workplace savings plan to a Roth IRA.

Roth IRAs can play a valuable role in your retirement portfolio. Unlike traditional IRAs, Roth IRAs are not subject to income taxes at the time of withdrawal in retirement. This can give you flexibility to manage your cash flow and future taxes.

Converting qualified assets, such as a 401(k) or traditional IRA, to Roth IRA assets is considered a taxable event during the conversion year. Any pre-tax contributions and all earnings converted to the Roth IRA are added to your gross income and taxed as ordinary income. 

Action step: Talk with your tax advisor or financial professional to determine if a Roth conversion is right for you. If you move forward, manage the tax impact strategically. One approach is to convert amounts only to the level where you remain in your current tax bracket. 

4. Take required minimum distributions (RMDs) by December 31.

All employer-sponsored retirement plans, traditional IRAs and SEP and SIMPLE IRAs mandate required minimum distributions (RMDs) once you reach a certain age. Annual withdrawals must happen by December 31 to avoid a steep penalty.

RMDs are considered taxable income. If you don’t need the cash flow and prefer not to increase your taxable income, you may want to consider a qualified charitable distribution (QCD) directly from your qualified account to a public charity. You won’t get the charitable contribution itemized deduction, but you satisfy the RMD requirement without adding to your taxable income.

5. Minimize capital gains tax on investments anytime throughout the year.

A capital gain is the profit from selling an asset, such as a stock, for more than you paid for it. The federal government taxes this profit with a capital gains tax.

There are several techniques you can use to reduce your tax burden on your investments. Consider discussing these options with your tax and financial professionals to determine which may be appropriate for your situation:

• Spread a sale over two years. If it’s practical for you, sell only a portion of your appreciated assets one year and the remainder the following year.
• Donate appreciated assets to a charity. You’ll avoid the capital gains tax entirely and, in most cases, be able to claim a deduction for the fair market value of those assets.
• Take advantage of tax loss harvesting. Defer taxes by using your market losses to offset some of the gains your assets see over the course of the year.
• Invest gains in Opportunity Zone funds. Shift money to qualified funds for disadvantaged communities to defer or even reduce the tax you owe.

6. Think about “bunching” certain itemized deductions into a single year.

Standard deductions have increased in recent years, making it harder for many people to itemize. "Bunching" itemized deductions into a single year may help you reach the minimum threshold to make itemizing worthwhile. Common itemized deductions include:

• Qualified mortgage interest, including points for buyers
• Casualty, disaster, and theft losses
• Investment interest on net investment income
• Medical and dental expenses
• Charitable contributions (note that you only get a tax deduction for the year in which you make the gift)

For example, let’s say you’d like to itemize your medical expenses. The threshold for itemizing medical expenses is 7.5% of your AGI. If your medical expenses total 5% of your AGI, it wouldn’t be beneficial to itemize. But, if you were able to delay 2.5% of your expenses to the following year, you’d be more likely to reach the minimum 7.5% AGI that next tax season, allowing you to itemize.

Strategic timing: If you’re close to the next tax bracket, consider deferring income (like a year-end bonus) to the following year to keep your current tax bill lower.

7. Make the most of your annual gifting by December 31.

The annual exclusion gifting amount allows you to give a specific amount to as many individuals as you like every year without using any lifetime estate tax exemption. Gifts more than the annual exclusion amount will reduce your available lifetime estate tax exemption. 

Strategic gifting before the end of the year can help transfer wealth to family members while reducing the size of your taxable estate. If gifting is part of your wealth plan, be sure to discuss your options with your tax and financial professionals.  

Your year-round tax planning checklist

Stay organized and avoid the spring scramble by following this strategic timeline.

Spring (Post-filing)

• Adjust your W-4 if you received a large refund or owed a large balance.
• Organize your tax documents from the filing you just completed.
• Set up automatic contributions to your IRA or 401(k) for the new year.

Summer (Mid-year check-in)

• Review your year-to-date income and anticipated bonuses.
• Check your FSA balance. If you have a "use it or lose it" plan, schedule doctor appointments or stock up on eligible supplies.
• Parents: Keep receipts for summer day camps, which may qualify for the Child and Dependent Care Credit.

Fall (Planning phase)

• Estimate your tax liability for the year.
• Review your investment portfolio for tax-loss harvesting opportunities.
• Plan any end-of-year charitable contributions.

Winter (Action time)

• Complete all 401(k) contributions by December 31.
• Make any final 529 plan contributions.
• Execute any Roth conversions.
• Take RMDs, if applicable.

Partner with a financial professional

A financial professional can help you see how different aspects of your finances (e.g., taxes, investments, and charitable giving) work together to support your goals. They can also partner with a tax professional to ensure you’re making informed decisions and help you align your tax strategy with your financial plan.

Share your vision and take full advantage of their expertise. With preparation and consistent attention, you can be more strategic about your taxes throughout the year.

Learn how our approach to wealth planning can help you see a full view of your financial picture.