Why Tax Planning is So Important
Just about everyone can reap the benefits of tax planning. There are tax implications for almost every big decision you make in your life. This includes getting married, having a child, buying or selling a house, investing, and retiring. Planning for these changes can save you money in the short- and long-term.
How Life Can Change Your Taxes
There are many decisions in your life where you should consider the tax implications. This includes:
Buying and selling a house
Getting a new job
Having a significant change in your income
Buying and selling investments
Donating to charity
Retiring or contributing to a retirement plan
Tax Planning Strategies
Consulting with a tax planning advisor can help you navigate through life changes, understand the tax implications of your actions, and identify tax saving opportunities to decrease the amount of tax you owe.
Lower Your Taxable Income
Having more money is good, but there may be times when it is better to reduce your taxable income, also known as your Adjusted Gross Income (AGI). Based on your AGI, you will be put into a tax bracket that provides you with your tax rate. Reducing your taxable income can put you in a different bracket and a lower tax rate. This doesn't mean that you'll make less money, but instead you can strategically distribute it amongst different channels to lower your taxable income. This can be done by contributing to your retirement account, donating to charity, and making above-the-line deductions.
Adjust Your Withholding
If you're an employee, then your employer is most likely withholding tax from your paycheck. The amount withheld from your paycheck is determined by the amount you earn in each payroll period, your payroll period, and the information you provide on Form W-4 such as filing status, the number of jobs you hold, dependents you can claim, and other adjustments. When major life events happen, you may need to adjust your withholding to ensure you're having the correct amount withheld.
Compare Standard vs. Itemized Deduction
Depending on your tax situation, you may have the option to take the standard or itemized deduction. The standard deduction is a fixed amount that adjusts every year based on your filing status. Itemized deductions are certain expenses that you can subtract from your AGI to lower your tax bill. Meeting with a tax advisor can help you determine which deduction is more beneficial for you.
Claim Credits and Deductions
There is an abundance of credits and deductions available to taxpayers. If you don't know about them, then you may be losing the opportunity to save money. Deductions are expenses you make throughout the year that you may be able to exclude from your taxable income. If you qualify for the itemized deduction, it's important to keep a list of your qualifying expenses with any receipts so you can include them on your tax return.
Tax credits, such as the Earned Income Tax Credit (EITC) or Child Tax Credit (CTC), can help you reduce the amount of tax you owe. There are refundable and non-refundable credits. Refundable credits will lower your tax bill and if it reaches below zero, you will be refunded the remaining amount of the credit. Non-refundable credits will lower your tax bill but will not be refunded for the remaining credit amount.
Choose the Best Investments and Retirement Plans for You
Your choice in investments and retirement plans should come with thoughtful consideration and tax planning. It requires you to think about your current situation and your short- and long-term financial goals. It's smart to talk with a tax advisor to see how different investment options and retirement plans may affect you.
Consider Timing
Whether it's selling stocks, making big purchases, or donating to a charity, timing can affect your tax bill. There are constant changes to tax laws and some years may be more beneficial than others for certain life decisions. Knowing tax laws are key to saving more money.
Meet with a Tax Advisor
When you meet with one of our tax planning advisors, they will take an in-depth look at your situation, help you understand tax implications, and identify tax saving opportunities. Tax planning is an ongoing process but there is no better time to start than right now. If you want to schedule a tax advising consultation, please feel free to give us a call at (360) 922-0235. We look forward to helping you plan for your future and reach your financial goals.
