tax planning

Taxes May Be a Certainty – But the Amount You Pay Doesn’t Have to Be

You do have some control over how much income tax you owe – if you don’t wait until Tax Day to start exploring your options. Take some steps throughout the year, and you may be pleasantly surprised.

We all want to be as efficient with our money as possible, and one way to accomplish that is to minimize the amount we pay in taxes.

Unfortunately, many of us aren’t as good about that as we should be. Often, people make financial decisions throughout the year without giving any thought to the tax implications and whether a different approach might have been wiser.

Let’s look at a few things that could help you in your quest to lower your tax bill, so you can keep more dollars to spend on the things that matter to you.

Understand your tax brackets

The U.S. tax code is quite overwhelming, so it’s difficult to understand all the nuances. But at a minimum, you should know where you lie in terms of the marginal tax rate. There are seven marginal tax rates that range from 10% to 37%, and as you move into higher income brackets, the percentage of your income over a certain amount is taxed at a higher rate. It’s important to be aware of this when you are making financial decisions.

For example, perhaps you are considering buying an investment property. But if the rental income from that property puts you into a higher tax bracket, it might not be as good a deal as you originally thought. Be aware of your marginal tax rate because you have greater control over your taxes if you understand where your starting point is.

See your tax professional two to three times a year

Many people visit their tax professionals once a year – usually after the tax year is over, which means they will simply be told how much they owe or how much their refunds will be. Once Dec. 31 has passed, it’s too late to do much about the bottom line, so this visit essentially is a “tell me the damage” visit.

The better approach is to see your tax professional two to three times a year.

  • The first visit should happen about mid-year. Talk about any changes to your life that might have tax implications. Review what happened in the prior year so you can avoid repeating mistakes.
  • Make a second visit toward the end of the year to discuss how things are going. If it looks like you should expect a refund, perhaps this would be a good time to do a Roth conversion because the refund could absorb some of the tax you would need to pay on the conversion. If you are going to owe money to the IRS, you should consider whether to deposit more in your retirement account or perhaps make a charitable donation, either of which could help reduce your tax bill.
  • Finally, the third visit to your tax professional would come after the tax year is over. This is the visit many people already do during tax-preparation season, where they learn what the damage is.

Take advantage of deductions

For most of the taxpaying population, itemizing deductions is no longer a thing. That’s because the Tax Cuts and Jobs Act of 2017 raised the standard deduction so high that a typical taxpayer can’t cobble together enough deductible expenses to total more than the standard. That’s the case for many retirees as well. For example, for 2021 the standard deduction is $12,550 for single taxpayers and $25,100 for married couples filing jointly ($12,950 and $25,900, respectively, for 2022).

But there are still strategies you can use to lower your tax bill through itemized deductions. One way is to give appreciated assets to charity. Maybe you have an IRA that will have required minimum distributions (RMDs) that will be taxed in the future. You could set up a Qualified Charitable Distribution (QCD) that transfers funds to a charity and those donations qualify as your RMD.

Understand capital gains

Understand the difference between long-term capital gains and short-term capital gains.

  • Short-term gains are profits you made from assets you have held for a year or less.
  • Long-term gains are profits made from assets you have held for more than a year.

The two types of gains are taxed with different rates, and generally the tax rate on short-term gains will be higher than long-term gains.  One way to help improve your tax situation with capital gains is through tax-loss harvesting. That’s when you sell some investments at a loss to offset the gains you made with other investments.

Contribute to retirement accounts

Be sure to contribute to your retirement accounts, especially if your employer offers a match. If you’re self-employed, it’s important to know that you can use a Simplified Employee Pension (SEP) IRA or a solo 401(k), which is a 401(k) plan specifically designed for business owners with no employees. Also, another thing worth knowing is that if you have a spouse who doesn’t work, you can contribute to a retirement account for your spouse. When these retirement accounts are tax-deferred accounts, your contributions will help lower your tax bill.

Be careful about giving assets to your children

Parents can be generous with gifts to their children, but sometimes that generosity leads to unwelcome tax ramifications. For example, let’s say you own real estate that you want to give to your children. It might be better for them taxwise if you leave it as part of your estate when you die rather than transfer ownership now. Why? Because of something called “step up in basis.”

If you give the property to them now, and they sell it, they will owe capital gains tax on the difference between what you paid for the property – perhaps decades ago – and the price they sell it for now. But if they inherit the property, that changes. Now their new basis for capital gains is the value of the property at the time they inherit it. So if they sell the property immediately, they will owe nothing.

Explore with your financial professional any potential tax consequences when you make such a substantial gift to your children.

These are just a few of the situations that might arise regarding taxes. That’s why those visits to a professional who can provide advice and direction are so important.

Yes, taxes may be a certainty. But the amount you owe doesn’t have to be.

Ronnie Blair contributed to this article.

Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Comprehensive Advisor, LLC is an independent financial services firm that utilizes a variety of investment and insurance products. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Comprehensive Advisor, LLC are not affiliated companies. C.A. Financial & Insurance Services, CA Ins. Lic. #6000262. Neither the firm nor its agents or representatives may give tax or legal advice. Individuals should consult with a qualified professional for guidance before making any purchasing decisions. Our firm is not affiliated with the U.S. government or any governmental agency. 1079489 – 10/21

About the Author

Brett Gottlieb, Investment Adviser Representative

Founder, Comprehensive Advisor Financial & Insurance Services

Brett Gottlieb is the founder of Comprehensive Advisor Financial & Insurance Services in Carlsbad, Calif. As a financial adviser, he helps pre-retirees and retirees with income planning, investment portfolio management, tax planning, health care planning and legacy planning. Gottlieb has bachelor’s degrees in business administration and economics from California State University-Chico. He has passed the Series 65 securities exam and is an independently licensed life insurance agent.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

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