Smart Tax Moves to Plan for the Next Financial Year

Summary: Tax season can prove overwhelming for many, but making smart moves ahead of time can help you avoid leaving hard-earned money on the table.

After filing your taxes, it’s easy to forget about them until next April. However, the best tax moves are made well before the next tax season.

Smart tax planning isn’t only about legally minimizing your tax bill; it’s also about thoughtfully maximizing your financial well-being.

Starting early and staying informed

By planning ahead, you give yourself the opportunity to maximize deductions, minimize liabilities and take advantage of tax-efficient investment opportunities before tax season officially descends.

The average taxpayer spends 13 hours preparing and filing taxes. Starting early allows you to spread out the workload, gather necessary documents, explore tax-saving strategies, and seek professional advice – all without the stress of a looming deadline.

As an early mover, you can gain a clearer picture of your financial situation, which, in turn, can help you make investment decisions that boost your financial security. Stay informed to support your early planning efforts.

Planning well ahead of the next financial year can potentially save you time , stress and money. In this guide, we’ll explore eight smart tax moves to help you get a head start on financial and tax planning.

8 smart tax moves to plan early on for the next financial year

1. Understand your tax bracket

Understanding your tax bracket is an essential first step, regardless of your income level. Use it to determine your taxable income, which is your total income minus any deductions or exemptions. Remember, tax brackets are progressive, meaning different portions of your income are taxed at different rates.

The IRS adjusts tax brackets and other provisions, such as retirement fund contribution limits, annually, to counter inflation. This prevents “bracket creep”, where cost-of-living adjustments or even raises in pay push workers into higher tax brackets without an actual increase in their standard of living.

Eliminating the guesswork about your tax bracket also helps clarify how a second job, working overtime, or any increase in income affects your taxes.

2. Leverage deductions to help decrease your tax bill

Besides widening tax brackets, the IRS adjusts standard deductions to benefit the ordinary taxpayer. 87% of taxpayers take the standard deduction (which is a preset amount fixed by the IRS) because it’s easy to understand and does not require additional forms to be filled out during tax filing. It’s also adjusted annually to match inflation.

For taxpayers whose income is higher and whose expenses exceed the standard deduction, itemizing deductions is a helpful tax strategy. It allows you to deduct a bigger number from your taxable income.

Itemized deductions allow you to claim the actual amount spent on specific deductible expenses, such as medical costs, state and local taxes, mortgage interest, and charitable donations.

Most people leverage the standard deduction. Opting for itemized deductions over the standard deduction can significantly impact your taxes, especially if you have the means to make strategic charitable donations. Additionally, if you’ve incurred substantial medical expenses, itemizing can help you recover some of those costs.

It’s always a good idea to consult with tax professionals or financial professionals to help identify tax-savvy strategies. The IRS site is also an excellent source for learning the basics of tax deduction and other related topics.

3. Optimize higher savings incentives

Maximize tax savings potential through early contributions to IRAs, HSAs, and 529 plans:

1. IRAs: Start early to benefit from tax-deferred growth and potential deductions, with catch-up options available.
2. HSAs: Early contributions maximize tax-deductible savings, with tax-free withdrawals for medical expenses.
3. 529 Plans: Begin funding early for tax-free growth towards educational expenses.

Contributing to these accounts early in the year can help you maximize tax benefits and ensure you are well-prepared for future expenses. For the most current contribution limits and specific rules, always check the IRS website or consult with a financial professional.

4. Take advantage of tax-efficient investments

Certain investments may provide tax advantages that can help reduce your tax liability, such as

Municipal bonds

Municipal bonds are often exempt from federal income tax and may also be exempt from state and local taxes if issued by your home state.

• Pros: Tax-exempt interest income.
• Cons: Generally lower yields compared to taxable bonds and potential risk if the issuing municipality faces financial difficulties.

Tax-deferred annuities

Tax-deferred annuities allow you to defer taxes on investment gains until you begin withdrawing funds in retirement, potentially reducing current taxes while enabling tax-free growth.

• Pros: Tax-deferred growth and potential guaranteed income in retirement.
• Cons: High fees, early withdrawal surrender charges and taxed as ordinary income upon withdrawal.

Indexed Universal Life Insurance (IUL)

Indexed universal life insurance policies usually offer both a death benefit and a cash value component.  The cash value grows tax-deferred, delaying taxes until funds are withdrawn.

You can access the cash value through tax-free loans and withdrawals, providing tax-efficient access to your investment.

• Pros: Tax-deferred growth, tax-free access to cash value, plus a death benefit.
• Cons: Complex policies, potentially high premiums and fees and risk of policy lapse if not managed properly.

For current contribution limits and rules on the above investments, consult the IRS website or a tax professional. All investing involves risk, including the possible loss of principal, and there can be no assurance that any investment strategy will be successful.

5. Consider tax-loss harvesting

Consider  tax-loss harvesting or selling investments at a loss to offset capital gains or income. This strategy can help reduce your tax bill while rebalancing your investment portfolio.

Pros:

• Reduces tax liability: Losses can be used to offset capital gains and up to $3,000 of ordinary income per year.
• Portfolio rebalancing: Rebalance your investment portfolio for better long-term alignment with your financial goals.
• Potential for enhanced returns: According to a Morningstar study, tax-loss harvesting can increase annual returns by 1% to 2% for taxable investment accounts. However, this return is not guaranteed.

Cons:

• Wash Sale rule: The wash sale rule prohibits claiming a loss on a security if you repurchase the same or substantially identical security within 30 days.
• Not for all investors: This strategy may not be appropriate for all taxpayers and investors, often favoring those who with substantial capital gains to offset.
• Complexity: Tax-loss harvesting can involve meticulous record-keeping and timing, often posing challenges to average retail investors without professional help.
• Tax deferral, not avoidance: Tax-loss harvesting reduces your current tax bill but is intended for tax deferral rather than tax avoidance. Taxes may still be owed in the future when gains are realized.

Note: Cryptocurrency investments currently do not fall under this rule, allowing for immediate repurchase after selling at a loss.

Tax-loss harvesting helps reduce tax and optimize returns but requires careful consideration of its complexities. Consulting with a tax professional or financial advisor can help determine if this strategy aligns with your financial goals and tax situation.

6. Organize your records

Good record-keeping makes for effective tax planning and tax filing. You should organize and keep all relevant financial documents accessible throughout the year, including

• W-2s and 1099s and other tax forms
• expense receipts
• investment records
• mortgage statements
• bank statements

Consider using digital tools like accounting software and/or cloud storage to securely organize and track your documents. This makes them easily searchable and reduces the risk of overlooking important information.

Be aware of record retention requirements:

• Tax records must be kept for 3 years
• Employment records for 4 years.

Thorough record-keeping streamlines tax preparation and helps in case of a review, such as a tax audit notice where you would need to present your records to the IRS.

7. Review your withholding

It’s important to review your withholding periodically to ensure you’re not overpaying or underpaying taxes throughout the year.  If you consistently receive a large refund at tax time, you may be having too much withheld from your paycheck, resulting in lost opportunities for investing or paying down debt.

On the other hand, if you owe a significant amount at tax time, you may need to increase your withholding to avoid penalties and interest.

Whatever the case, the IRS recommends that you “consider completing a new Form W-4 each year.” Apart from that, it’s necessary to also complete a new form when there is a change in your financial situation.

The IRS provides a withholding calculator to help you determine the right amount to withhold based on your individual circumstances.

Make sure to work with a reputable and competent professional so you don’t fall prey to identity-theft and other tax scams. Otherwise, you could be left liable for unpaid taxes, penalties, and interest.

8. Consult with a tax professional

Tax planning and wealth creation go hand in hand; so if you want to maximize your investment dollars, tackling taxes is essential.

Consulting a qualified tax professional early on can help you with complex tax laws and identify potential deductions and credits to develop a tax strategy that suits your specific circumstances and financial goals.

The advice of a tax professional like a CPA or tax attorney can ensure tax compliance and pave the way to greater financial success, whether you’re self-employed, a small business owner, or an individual taxpayer. Consulting with a financial professional in addition to a tax professional can also help build a full financial picture for the next tax year.

Conclusion

The first-mover benefits of tax planning can be numerous: At the very least, it allows for a financial health check, which helps identify opportunities to reduce taxes and increase savings. By preparing early, you can avoid last-minute surprises like insufficient funds for tax payments, preventing penalties and interest charges.

Filing early is itself a reward. You have not only accomplished what is perhaps the most important financial task of the year but potentially avoided scammers and defaults.

By taking proactive steps now, you can set yourself up for success well ahead of tax season. With careful planning and proactive decision-making, you gain control over your taxes and keep more of your money in your pocket.

If you need any assistance, don’t hesitate to contact us at Mutual of Omaha. We remain committed to providing resources that can help you protect what matters most.

Frequently asked questions

Q1: Is it ever too early to start planning for next year’s taxes?

No, the earlier you start, the more time you have to implement strategies to help minimize tax liability and maximize savings.

Q2: How can I maximize my tax refund?

Claim all eligible deductions and credits, contribute to retirement accounts and keep organized records. Consulting a tax professional can also help.

Q3: How can I adjust my tax strategy if my financial situation changes during the year?

Reassess your tax strategy if your financial situation changes due to a job change, marriage, or the purchase of a home. Adjust your withholding allowances, increase retirement contributions, or explore new tax-saving opportunities.  Consider consulting with a financial professional to help make a plan tailored to your needs and help prepare you for any financial changes.

Q4: What should I do if I receive a large windfall or unexpected income during the year?

Adjust tax withholding, make estimated payments, or strategize investments to lessen taxes on windfalls like inheritance, bonuses, or capital gains. Consider a tax or financial professional to help navigate the impact of this unexpected income.

Q5: What should I do if I receive a tax notice or audit from the IRS?

Review the notice, gather the relevant documents and consider seeking advice from a tax professional to respond to the notice effectively and on time. You may also need the advice of a tax professional to handle an audit.

Disclosures:

Registered Representatives offer securities through Mutual of Omaha Investor Services, Inc., Member FINRA/SIPC. Investment Advisor Representatives offer advisory services through Mutual of Omaha Investor Services, Inc.

Mutual of Omaha and its representatives do not provide tax and/or legal advice, and the information provided herein is general in nature and should not be considered tax and/or legal advice.

Not all Mutual of Omaha agents are registered representatives or financial advisors.