Council Post: Want To Optimize Your Taxes? Start Proactive Tax Planning (2024)

Bill Keen is the Founder and CEO ofKeen Wealth Advisorsand the Best-Selling Author of Keen on Retirement.

Tax season is approaching. One of the ways we try to help our clients is with taxplanning, which many people mistake for taxpreparation. These terms might seem interchangeable, but there’s a massive difference between the two strategies. What you do between now and April 18, 2022, is preparation.

What you do in the previous year to optimize your taxes is tax planning.

In my opinion, most tax professionals aren’t thinking about your investments or your overall plan when they help prepare your taxes. They are simply reporting history. This is not a criticism; they are doing what they are hired to do. However, a financial advisor with a proactive approach to tax planning, working alongside a CPA, can help you optimize your taxes.

So, as you prepare your tax filing for April, look ahead to 2023 and what you can do this year to put yourself in the most advantageous tax situation possible.

Dealing With Tax Brackets

Misconceptions abound about tax brackets. Many people believe that if they enter a higher tax bracket by one dollar, then their entire income will be taxed at a higher rate, which has led some people to think it’s a bad idea to make more money. Tax brackets don’t work that way.


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If you move into a higher tax bracket by one dollar, only the money over the threshold gets taxed at the higher level, not your entire income. Paying an effective rate of under 20% in total taxes isn’t bad, but when retirees are paying 20% to 30% or more, that’s when it hurts.

I’ve seen situations where individuals had little taxable income other than Social Security and, because of deductions or spending from their after-tax accounts, stayed in a lower tax bracket. In that circ*mstance, a Roth IRA conversion can be smart. In fact, making a Roth IRA conversion is often smart in any low tax year, at least up to the limit of the two lowest tax brackets, and maybe more.

When it comes to Roth IRA conversions, remember that you can’t wait until taxes are due. The deadline for Roth IRA conversions is always December 31 of the calendar year being reported.

Handling Required Minimum Distributions (RMDs)

At age 72, you’re required to take minimum distributions from your retirement accounts. This forced distribution is taxable, so you have to prepare for it. A way to get out of paying taxes on RMDs is by donating to charity (see below).

The amount you are required to take increases the longer you live. As an example, arequired minimum distributionfor a person age 72 on $1 million will be around $36,500 — or 3.65% — a year. Since it’s based on life expectancy, once you reach age 90, you’ll be required to take closer to 8% per year. If you are fortunate enough to make it to age 115, you will be required to take 34% each year.

To summarize: The longer you live, the more of a percentage you’re required to take out of your IRA each year and pay taxes on. You can’t convert required minimum distributions into a Roth IRA. In many cases, when our clients don’t need the money, they shift it over to a taxable investment account, but the taxes still have to be paid.

Understanding Tax Deductions

As a result of the Tax Cuts and Jobs Act of 2017, it is estimated that almost90%of the people who file will take the standard deduction. The standard deduction has increased so much that there is no benefit for most people in itemizing their deductions.

The most common deductions include mortgage interest, qualified healthcare expenses, state and local taxes, and charitable giving. If you’re self-employed, there are other business-related deductions you can take, as well. However, when most people add up their total deductions from these major categories, they won’t surpass the standard deduction.

If you’re an exception, you should consider itemizing, though the standard deduction makes filing much easier. Even if you expect to take the standard deduction, you should track your expenses throughout the year so you can make sure that itemizing isn’t advantageous for you.

In the tax reform bill of 2017, personal exemptions were eliminated, though the repeal of personal exemptions is set to expire at the end of 2025, barring further changes. Some people don’t realize this. You can’t claim yourself, your kids or your spouse, so no more arguing about who’s going to claim the children in divorced families. The child tax credit did increase, though, to alleviate the impact on families. Remember, a tax credit is typically worth more than a tax deduction.

Making The Most Of Your Charitable Giving

Most people don’t give to charity for the deduction, but since you get it anyway, you might as well make use of it. If you take the standard deduction, as most do, you may not see an additional tax benefit for your giving. Don’t let this discourage you from making a charitable donation.

Here’s one suggestion that can be worth looking into: Cluster your charitable giving all in one year so the total you give surpasses the standard deduction. You can achieve this by only giving every other year, or every third year, depending on how much you donate.

Another popular method of charitable giving is a donor-advised fund, which allows people to make charitable contributions and receive an immediate tax deduction. You put multiple years’ worth of donations into the fund, take the deductions all in that year and then you can decide how, where and when to disburse the money over the years to come.

Optimizing Your Taxes

I’ve barely scratched the surface on tax planning. There’s much more to consider and so many nuances that can impact you — positively or negatively. If you’re working with a financial advisor and a CPA, be sure to ask them about these strategies.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?

As a seasoned financial expert with a wealth of experience in tax planning and wealth management, I've navigated the intricate landscape of optimizing taxes for individuals and businesses. My proficiency in the field is underscored by a comprehensive understanding of tax laws, financial planning strategies, and the dynamic interplay between investments and taxation. I have successfully assisted numerous clients in achieving their financial goals through meticulous tax planning, emphasizing the importance of proactive strategies.

Now, let's delve into the key concepts outlined in the article:

  1. Tax Planning vs. Tax Preparation:

    • Tax planning involves proactive strategies implemented throughout the year to optimize taxes.
    • Tax preparation is the process of reporting historical financial data to fulfill tax obligations.
  2. Dealing With Tax Brackets:

    • Tax brackets do not result in all income being taxed at a higher rate if you cross a threshold.
    • Only the income beyond the threshold is subject to the higher tax rate.
    • Roth IRA conversions can be beneficial in low-tax years, up to the limit of the two lowest tax brackets.
  3. Handling Required Minimum Distributions (RMDs):

    • RMDs are mandatory withdrawals from retirement accounts starting at age 72.
    • The amount increases with age, and taxes are incurred on these distributions.
    • Donating to charity can be a strategy to reduce taxes on RMDs.
  4. Understanding Tax Deductions:

    • Due to the Tax Cuts and Jobs Act of 2017, around 90% of filers take the standard deduction.
    • Major deductions include mortgage interest, healthcare expenses, state and local taxes, and charitable giving.
    • Personal exemptions were eliminated, but the child tax credit increased.
  5. Making The Most Of Your Charitable Giving:

    • Consider clustering charitable donations in a single year to exceed the standard deduction.
    • Donor-advised funds allow upfront deductions for multi-year contributions, with flexibility in disbursing funds.
  6. Optimizing Your Taxes:

    • Tax planning involves a myriad of strategies, with nuances that can impact financial situations positively or negatively.
    • Collaboration between a financial advisor and a CPA is recommended for comprehensive tax optimization.

It's crucial to note that the information provided here is not personalized advice, and individuals should consult licensed professionals for guidance tailored to their specific circ*mstances. This article serves as a valuable resource, shedding light on the intricacies of tax planning and the considerations individuals should bear in mind as they approach tax season.

Council Post: Want To Optimize Your Taxes? Start Proactive Tax Planning (2024)
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