Woohoo! It’s July. You’ve made it halfway through the year (and what a year it’s been). It may feel strange to think that now is the time to start thinking about next year, but if you want to start getting strategic with your taxes, now is the time to get the ball rolling.
Plan Now, File Later
Many people tend to wait until the new year to start thinking about taxes, but there are two primary problems with this approach:
1. When you go to file your taxes, you’re reporting financial moves made from the year prior. By waiting to engage in a strategy until January, you’ve missed the opportunity (in most cases) to implement any sort of strategic moves. Essentially, once you get to January 1, you’re too late! This means that for many tax strategy changes to “count” they need to be completed by December 31.
2. Financial experts are bogged down by paperwork at peak tax season. Even if they could implement certain strategies, they likely don’t have the time to engage in deeper conversations, particularly with prospective clients.
Instead, late summer/early fall is the perfect time to start thinking strategically. Here’s why:
1. Typically, by August a tax specialist will be able to develop a pretty clear understanding of where you’re coming out tax-wise for the year.
2. Also, by the time we’re heading into Fall, we typically have a better idea of changes to the tax law. This isn’t always the case, but it’s certainly the time of year when it’s possible to anticipate most changes.
Get Your Affairs in Order
So, with that in mind, we say that now is the time to get in touch with someone who can help you establish a plan. Many financial experts engage in tax planning. You might work with a CPA, financial advisor, or your tax preparer. Who you engage with is up to you, but we encourage you to do your research, ask around for recommendations, and schedule some interviews.
Ideally, by the end of the summer you’ve hired someone that feels like a good fit and you’re ready to roll up your sleeves and start talking taxes.
Now is also a good time to start collecting paperwork and getting your spreadsheets cleaned up. In anticipation of your meetings, make sure you’ve gathered as much of the following as possible:
· Your tax returns from the past two years
· Earnings for the year (so far), as well as taxes paid
· Any projections for earnings through the rest of the year
· For retirees, withdrawals from any taxable sources along with planned withdrawals through the end of the year
· Records of your taxable assets including cost basis for brokerage accounts
· Information about savings vehicles available to you such as HSAs, 401ks, SEP-IRAs, etc.
Know What To Expect
A tax plan is essentially a simulation. Based on projections, the financial expert creates a mockup. This mockup shows you how your taxes will pan out if you filed without making any changes (and assuming all things stay constant between now and the end of the year).
Scenarios are then run to show how your taxes would change based on specific financial moves.
The ultimate goal (most of the time) is to improve your bottom line and take full advantage of the big financial picture come tax season.
Often, this means strategically organizing your assets so that you max out your current tax bracket — especially if you expect to be in higher tax brackets in the future.
Common tax planning strategies to explore include:
· Looking at your cash flow for the rest of the year and maximizing 401k contributions or other retirement savings
· Reducing low basis stock holdings in taxable accounts
· Exploring tax loss harvesting
· Roth IRA conversions
· Opening and/or contributing to 529 plans for children, grandchildren, and other loved ones
· Identifying changes in eligibility based on the updated tax laws
· Accelerating or deferring expenses or income depending on anticipated changes to your future income or tax law
· Double checking quarterly estimates to avoid penalties
· Updating tax withholdings for any major life changes
Tax planning is inherently a part of any sound financial plan. But the degree to which you need a formalized tax plan depends on your specific circumstances. If you’re currently a Prosperity People client, consider reaching out to us to discuss the right approach for you.
If you don’t yet partner with The Prosperity People for financial planning services, let’s talk about designing a financial plan to meet your goals (and how tax plays a role in the bigger picture).