7 Tax Planning Strategies and Tips to Reduce Headaches Next Year

As tax season wraps up and the stress of filing starts to fade, it's an opportune moment to reflect on the past year’s financial journey and strategize for the one ahead. With the burdensome task of tax preparation still fresh in our minds, here are several insightful tax planning suggestions designed to simplify the process and minimize surprises next year.

7 Tax Planning Strategies and Tips to Consider

1. Review your recent tax return 

The first step in effective tax planning is to closely examine your recent tax return. Identify any areas where you encountered challenges or noted discrepancies and consider how you can adjust your approach for the upcoming year. One of the most important parts of your tax return is the amount of tax withheld from your income. Be sure to carefully check and review your withholdings. Did you owe a significant amount of tax at filing, or did you receive an unexpectedly large refund? If the latter is true, remember that receiving a big refund means you've essentially given the IRS an interest-free loan. Adjust your withholdings to better align with your actual tax liability. Conversely, if you found yourself owing taxes, note that this can also lead to penalties and interest charges.

Life changes — such as a new job, marriage, or the addition of a child — can impact your tax situation. Be sure to review and update your withholdings throughout the year to reflect these changes.

2. Maximize contributions to tax-advantaged accounts

Taking full advantage of tax-advantaged accounts is one of the best ways to reduce your taxable income. Max out your contributions to retirement accounts and Health Savings Accounts (HSAs) within the allowable limits. Review your financial situation and budget to ensure you're optimizing these contributions, as they can significantly decrease your tax burden.

3. Keep records of charitable contributions

If you contribute to charitable organizations, maintain organized records throughout the year. It's easy to be altruistic, but without thorough documentation, you might find yourself unprepared come tax time. Keep track of your donations and ensure that your financial situation allows you to continue supporting causes you care about.

4. Evaluate after-tax investments

After-tax investment accounts may not provide the same tax advantages as retirement accounts, but they offer unique opportunities for tax planning. Strategies like tax-loss harvesting can be beneficial, as can holding investments long enough to qualify for long-term capital gains tax rates, which range from 0% to 20%. Remember that short-term capital gains are taxed at your ordinary income rate, highlighting the importance of strategic investment planning.

5. Organize tax documents year-round

To alleviate the stress that often surrounds tax season, take a proactive approach by organizing your tax documents as you receive them. Whether you prefer a digital format or traditional paper, establishing a systematic filing system can save you time and headaches. Immediately scan any documents you receive and label your PDFs with recognizable names for easy access.

6. Consult with a tax professional mid-year

If you rely on a tax accountant or professional to file your taxes, consider scheduling a mid-year check-in. This meeting can provide valuable insights into the information they will need from you, helping to ensure that you're prepared and minimizing any last-minute scrambling as the deadline approaches.

7. Be mindful of important dates

If your tax situation requires you to pay quarterly taxes, make a note of important payment deadlines. Being aware of these dates can help you avoid penalties and keep your finances on track throughout the year.  Always remember you can file an extension, but if you owe taxes, pay them before the due date to avoid potential penalties and interest on the amount owed.

 While taxes can be a significant source of stress, adopting a year-round proactive approach to tax planning can transform the experience into a manageable process. By reviewing your previous tax return, adjusting withholdings, maximizing contributions, and staying organized, you can limit the headaches associated with tax time next year. Taking these steps not only empowers you financially but also ensures you’re well-prepared for whatever tax season brings.

Connect with your advisor to discuss these strategies and tips to ensure a smoother tax season next year.