Tax planning plays a crucial role in a comprehensive wealth management strategy. The ultimate objective is not to assist individuals in evading taxes but rather to lessen their tax burden by employing sensible estate planning, making significant charitable contributions, and possessing a comprehensive understanding of state and federal tax laws pertaining to their unique circumstances. Each client’s situation, income sources, investments, and supplementary earnings differ, making it imperative to acknowledge that no two clients are alike.
While most Americans only consider taxes during tax season, tax planning requires year-round efforts to minimize tax obligations. By collaborating with your CPA, you can work alongside your investment advisors and estate planning experts to explore potential tax deductions, allowances, exemptions, and credits for which you may qualify. Equipped with a well-devised strategy, your advisor can guide you in making investment and expenditure choices that align with your tax goals.
- Leverage Retirement Accounts
As mentioned earlier, your circumstances are unique, so your personalized tax preparation should also be tailored to your specific situation. One strategy to consider is maximizing the benefits of IRA contributions to reduce your annual tax burden, assuming your income allows it. A traditional IRA is a retirement savings account that offers the advantage of potential tax savings. Contributions made to your IRA can lower your tax obligations. Generally, contributions to a traditional IRA may be fully or partially deductible from your income, depending on your circumstances. However, if you have a high income, you may face limitations on the amount you can deduct. The deductibility of your contributions is influenced by factors such as your filing status and whether a retirement plan covers you through your employer. It’s important to note that although you don’t pay taxes on the contributed amount in the year of contribution, you are not exempt from taxes altogether. When you eventually retire and start withdrawing funds from your traditional IRA, including any investment earnings, they will be subject to taxation.
- Identify Your Deductions
It is important for everyone to explore tax deductions as they can have a significant impact on reducing tax obligations. A tax deduction refers to an amount of money subtracted from your taxable income within your specific tax bracket. Doing so lowers your taxable income, resulting in a decrease in your overall tax liability. Tax deductions come in two forms: the standard deduction and itemized deductions. Although both types serve the purpose of reducing tax liability, they operate differently. With the standard deduction, you subtract a predetermined flat amount the government sets from your income. On the other hand, itemized deductions encompass a range of eligible expenses deducted from your adjusted gross income, thus lowering your tax bill. Standard deductions include medical and dental expenses, charitable contributions, work-related education costs, and expenses related to the business use of your home or vehicle.
- Use Applicable Tax Credits
A tax credit directly reduces the actual amount of taxes owed rather than simply decreasing your taxable income like a tax deduction. Similar to deductions, tax credits are categorized into two types: nonrefundable and refundable. With a nonrefundable tax credit, the savings will increase your tax refund or generate a refund if you were initially entitled to one. You can only receive a refund up to the amount you owe in taxes. Conversely, a refundable tax credit can result in a refund if the tax credits exceed the amount of tax you owe. It allows for the possibility of receiving a refund beyond your tax liability. When considering tax credits, exploring some commonly used ones, such as the Earned Income Tax Credit, the Child and Dependent Care Credit, the Child Tax Credit, and the Residential Energy Efficient Property Credit, is worthwhile. Additionally, there are numerous other credits that a reliable tax preparation team can assist you in identifying.
Get a Financial Advisor & Wealth Management Team
Tax planning is safe and intelligent and is not tax evasion. Hiring a premier tax professional and developing a tax plan will undoubtedly save you time, anxiety, and money. Each year you put effort into tax planning together, it will get easier and better, and you’ll realize a ton of savings.
The Investment Counsel Company is an innovative advisory firm combining investment consulting, business acumen, professional networking, and career guidance. Located in Las Vegas, NV, tax planning has been a specialty of ICC since 1987.