Why Year-Round Tax Planning Is So Important
By Marjorie L. Rand, CPA, CFP®, RICP®
Traditionally, tax preparation has been linked to a last-minute rush to minimize liabilities. However, tax planning should be an ongoing process, not a once-a-year task. By consistently monitoring your entire financial picture year-round, you can enhance your tax strategy, reduce your tax liability, and strengthen your overall financial well-being.
In this article, I explore the importance of year-round tax planning and provide practical tips for incorporating it into your financial routine with ease.
Why Year-Round Tax Planning Matters
There are several upsides to tax planning throughout the year. With just a little bit of preparation, you can significantly lessen the stress traditionally associated with tax season. Planning ahead helps you eliminate any uncertainty you have about the deductions you qualify for as well as how much you might owe.
Tips for Year-Round Tax Planning
While it may seem daunting to plan for taxes year-round, it doesn’t have to be. Here are some easy ways to develop good tax-planning habits all year long.
Optimize Tax-Incentivized Accounts
Health savings accounts (HSAs), 401(k)s, and other tax-incentivized funds are your friends when it comes to taxes. It’s good practice, if you can, to contribute as much as possible to these accounts since it reduces your taxable income and helps you save for the future.
Deferring Income
In years when you are earning a higher income, you may want to consider deferring some of that income to future years, especially if you’re nearing retirement. This strategy is available to employees whose company offers a nonqualified deferred compensation plan, which allows you to defer a portion of your current compensation to a later date.
The deferred income becomes taxable only when you receive it, typically after a triggering event, such as leaving the company, retiring, or reaching a specific age. This approach can reduce your current taxable income and potentially lower your tax liability, but you’ll need to weigh the benefits of deferring income against your cash-flow needs and future tax expectations.
Accelerating Income
During lower-income years—such as after job transitions, layoffs, or business downturns—consider accelerating income. This may include increasing work hours or strategically converting traditional retirement accounts into Roth IRAs. The goal is to take advantage of your lower tax bracket by recognizing income sooner rather than later.
Taking Required Minimum Distributions (RMDs)
Once you reach age 73, or 75 (depending on when you were born), you’re required to take RMDs from traditional retirement accounts like IRAs and 401(k)s. These withdrawals are subject to income tax and missing them can result in hefty penalties. Managing RMDs effectively requires looking ahead to determine how they might impact other income sources and trigger additional taxes or higher Medicare premiums. One tax strategy to consider is spreading your RMD over the year or converting a traditional IRA to a Roth IRA.
Tax-Loss Harvesting
If you hold investments in taxable accounts, tax-loss harvesting can be a valuable strategy to offset capital gains by selling investments at a loss. This helps lower your taxable income for the year. It’s essential to be aware of the wash-sale rule, which prevents repurchasing substantially identical securities within 30 days of the sale, ensuring the tax loss is valid.
Bunching Deductions
Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chance of going above the standard deduction amount and being able to itemize your deductions in that year, leading to more significant tax savings.
For example, instead of donating $1,000 to your favorite nonprofit each year, you might donate $10,000 in one year, allowing you to itemize in that year and potentially benefit more from the deduction. Bunching can apply to other expenses as well, such as medical expenses, business expenses, or even contributions to a 529 plan. Just be mindful of certain caps or limitations on deductions, so you can take full advantage of this strategy.
Keep Thorough Records
Pay stubs and receipts shouldn’t be kept in a shoebox. It’s important to know how much you made during the year and how much you’ve spent on items that qualify for tax deductions. Technology is on your side here. Apps and software help you keep track of deductible expenses and can automatically organize and track your budget.
Maintain Receipts for Deductions and Credits
Maintain a record of the money you spend on your business, charitable contributions, and any educational costs. All these expenses are potentially deductible, so it’s important to know the largest amount you can claim.
Modify Your Withholding and Estimated Payments
If you have a job, check your withholding to confirm the amount being deducted matches what you anticipate owing. If you’re self-employed, paying estimated quarterly taxes is a smart way to avoid large and unexpected expenses when tax season rolls around.
Get Ready for Filing Early
This final tip makes tax time significantly less stressful. Know in advance the types of tax documents you receive and start collecting and filing them as soon as possible. Once you’ve organized all your documents, you can go ahead and file your taxes. You don’t have to wait until the last minute!
Collaborate With a Tax-Focused Financial Advisor
Don't let tax planning overwhelm you. At Rand Financial Planning, LLC, you’ll partner with a CERTIFIED FINANCIAL PLANNER® and CPA who understands the intricacies of both financial planning and tax laws.
As part of my comprehensive wealth management services, I prepare your personal tax returns, giving me a complete picture of your unique tax situation. This hands-on approach allows me to proactively integrate tax-saving strategies into your financial plan, helping you minimize taxes year after year and across generations.
Ready to see how a tax-focused approach can benefit your financial future? Schedule a 20-minute introductory call or reach out to me at 908-895-2406 or marge@randfinancialplanning.com to see if I’m the right fit to help you on your financial journey.
About Marge
Marjorie Rand is founder and financial advisor at Rand Financial Planning, a comprehensive, fee-only, fiduciary financial planning firm based in Flemington, New Jersey. Marge specializes in helping her clients plan for a secure retirement and navigate life’s many transitions through customized, tax-efficient retirement planning. She is passionate about empowering her clients to make the best financial decisions for their life and being by their side no matter what life throws at them. Marjorie spent many years as a CPA, specializing in estates, before founding Rand Financial Planning so she could be a go-to source for all her clients’ financial needs and help them avoid costly mistakes. She has a bachelor’s degree in accounting from Rutgers University and a Master of Science in Taxation from Fairleigh Dickinson University, along with the Retirement Income Certified Professional® (RICP®) and CERTIFIED FINANCIAL PLANNER® certifications. When she’s not working, Marge enjoys boating, horseback riding, traveling, and hiking with her husband and her dog, Rangeley. To learn more about Marjorie, connect with her on LinkedIn.