Year-Round Tax Planning Tips for taxpayers. Simple things you can do throughout the year to make filing season less stressful and learn advantageous ways to lower your current and future tax bill.
Organize Tax Records. Create a system that keeps all important information together. Taxpayers can use a software program for electronic record keeping or store paper documents in clearly labeled folders. They should add tax records to their files as they receive them. Organized records will make tax return preparation easier and may help taxpayers discover overlooked deductions or credits.
Identify Filing Status
A taxpayer's filing status determines their filing requirements, standard deduction, eligibility for certain credits, and the correct amount of tax they should pay. If more than one filing status applies to a taxpayer, they can get help choosing the best one for their tax situation with the IRS’s Interactive Tax Assistant, What is my filing status. Changes in family life — marriage, divorce, birth, and death — may affect a person's tax situation, including their filing status and eligibility for certain tax credits and deductions.
Understand Adjusted Gross Income (AGI). AGI and tax rate are important factors in figuring taxes. AGI is the taxpayer's income from all sources minus any adjustments. Generally, the higher a taxpayer's AGI, the higher their tax rate and the more tax they pay. Tax planning can include making changes during the year that lower a taxpayer's AGI.
Check Withholding
Since federal taxes operate on a pay-as-you-go basis, taxpayers need to pay most of their tax as they earn income. Taxpayers should check that they're withholding enough from their pay to cover their taxes owed, especially if their personal or financial situations change during the year. To check withholding, taxpayers can use the IRS Withholding Estimator. If they want to change their tax withholding, taxpayers should provide their employer with an updated Form W-4.
Save for Retirement. Saving for retirement can also lower a taxpayer's AGI. Certain contributions to a retirement plan at work and to a traditional IRA may also reduce taxable income. Contributions to certain retirement accounts, such as a 401(k) or a traditional IRA, are made with pre-tax dollars. This means that the amount contributed is subtracted from the taxpayer's gross income, reducing their AGI. A lower AGI can decrease the overall tax liability and potentially make the taxpayer eligible for additional tax credits and deductions.
Retirement Tip: When planning for retirement, it's important to balance tax-deferred accounts, like 401(k)s and traditional IRAs, with tax-advantaged accounts, such as Roth IRAs, annuities, etc.
Tax-deferred contributions reduce current AGI, providing immediate tax benefits, but withdrawals in retirement are taxable. In contrast, Roth IRAs don't offer an immediate tax break, but withdrawals are tax-free in retirement.
Over-reliance on tax-deferred accounts can lead to higher taxable income in retirement, potentially increasing tax liability. Diversifying between account types can provide tax flexibility and optimize tax outcomes throughout retirement.
Retirement Tip for Small Business Owners: Employer-sponsored retirement plans can benefit small business owners in several ways. Contributions to retirement plans, such as a SEP IRA or SIMPLE IRA, Profit Sharing, and Pension Plans are tax-deductible, reducing taxable income. Business owners can also contribute to their own retirement, benefiting from the same tax advantages and savings growth as their employees.
In addition, offering a retirement plan also make your small business more attractive to current and potential employees, enhancing recruitment and retention. Employees with retirement benefits often feel more valued and secure, thus leading to higher morale and productivity.
By balancing immediate tax benefits with long-term retirement savings, small business owners can improve both their financial future and their company's competitive edge.
When planning for retirement, it's crucial to understand all your options. Whether you’re an individual or a small business owner, develop a sound plan considering IRS regulations and other factors that will impact your retirement savings, dictating how much you get to keep! For a tax-efficient strategy, schedule a consultation, Unifirst Financial & Tax Consultants can help you navigate your retirement planning needs effectively. Our team of experts will develop a comprehensive plan that will maximize your financial security in retirement.
References
Internal Revenue Service. (2024, May 22). Year-round tax planning pointers for taxpayers. U.S. Department of the Treasury. https://www.irs.gov/newsroom/year-round-tax-planning-pointers-for-taxpayers
