Tax Planning

Tax planning is ongoing

Most people think about taxes once a year, when they file. But many of the decisions that affect your tax bill happen throughout the year: how you save for retirement, how you invest, and when you make big financial moves. Thinking about taxes a little as you go can help you keep more of what you earn.

Understand how your income is taxed

The U.S. federal income tax system is progressive, which means different portions of your income are taxed at different rates. Your top rate, called your marginal rate, applies only to the last dollars you earn, not to your entire income. Knowing this helps you see the real effect of a raise, a bonus or an extra deduction.

Credits and deductions are different

A deduction reduces the amount of income that is taxed. Most taxpayers take the standard deduction, while some itemize if their eligible expenses add up to more. A credit reduces your tax bill dollar for dollar, so it is often more powerful. Common credits relate to children, education and certain energy improvements, and each has its own eligibility rules.

Use tax-advantaged accounts

Retirement accounts like 401(k)s and IRAs can lower your taxes now or, depending on the type, let your money grow and be withdrawn tax-free later. Health savings accounts, available with certain high-deductible health plans, can offer tax benefits when used for qualified medical expenses. Education savings accounts can help as well.

Taxes and your investments

In a regular taxable account, how long you hold an investment matters. Gains on investments held longer than one year are generally taxed at lower long-term rates than short-term gains. Investors can also use losses to offset gains, a strategy known as tax-loss harvesting. Where you hold different investments can make a difference too.

Keep good records

Organized records of income, receipts, donations and account statements make filing easier and help you claim everything you are entitled to.

Common mistakes

• Waiting until the last minute
• Missing out on employer retirement contributions
• Not considering how a large sale or withdrawal affects your taxes
• Assuming last year’s situation is the same this year

Tax rules change regularly, so it is a good idea to confirm the current rules each year.

Your next step

Taxes touch nearly every financial decision. For specific tax advice, work with a qualified tax professional. To see how taxes fit into your bigger financial plan, request a free consultation.