Tax Planning Should be a Focus for All seasons

With tax season over, some taxpayers may want to forget about taxes until next year. But there may be an advantage to make tax issues a planning priority year-round. Focusing on tax planning can help individuals find ways to improve their tax situation throughout the year.

Here are some tax planning considerations now that the filing season is over for most taxpayers.

Determine your marginal tax bracket

On the 1040 form for 2024, line 15 reflects taxable income. This figure defines an individual’s marginal tax bracket, which is useful for tax planning. For details on tax brackets and marginal rates for 2025 see “2025 tax rates, schedules and contribution limits.” Knowing your marginal tax bracket for 2024 can aid in planning for this year by providing a sense of what income may look like for 2025. For those in lower tax brackets, strategies that increase income (e.g., Roth conversions) may make sense. Those in the highest tax brackets may want to consider strategies to reduce income. These actions could include contributions to health savings accounts or a pretax retirement account.

Did you claim the standard deduction this year?

Given the scaling back or elimination of many deductions, combined with the doubling of the standard deduction beginning in 2018, most taxpayers claim the standard deduction on their return. For those giving to charities, there may be tax-smart alternatives, such as lumping multiple years of charitable gifts into one year, or using the qualified charitable distribution (QCD) strategy. See “Donating IRA assets to charity.” For those claiming the standard deduction, the QCD option may be attractive since it allows those over the age of 70 ½ to distribute from an IRA tax-free if those funds are sent directly to a qualified charity. For others, lumping several years of charitable gifts into one year may allow a taxpayer to itemize deductions for that tax return during a year where income may be higher.

Review retirement plan contributions

Taxpayers may find they can increase retirement plan contributions and lower next year’s tax bill. Or, depending on the tax bracket, it may make sense to allocate a portion of salary deferrals to Roth accounts within an employer plan. Holding a mix of pretax and after-tax (e.g., Roth) savings can provide tax diversification in retirement. Having a choice of where to draw income in retirement may help hedge the risk of higher taxes in the future. For example, a taxpayer in the highest tax bracket in retirement needing more income may consider drawing tax-free income from a Roth account if available. Lastly, a new provision beginning this year allows those ages 60 through 63 to make a higher catch-up contribution in certain workplace retirement plans. For more information see “SECURE 2.0: What’s new for 2025?”

Make sure withholding is on target

Federal taxes are based on a pay-as-you-go system. It’s important that taxpayers assign the appropriate withholding amount since the IRS can impose a penalty and interest if taxes paid via withholding or quarterly estimated payments are incorrect. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholding and refundable credits. They may also avoid the penalty if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller. Taxpayers may also want to make sure they are not withholding a significant amount more than is required. If they do, they are essentially giving the government a no-interest loan for the year in lieu of having those funds to invest and work for them.

Seek expert advice

It is always optimal for taxpayers to meet with a financial professional with knowledge of their personal financial situation. Seeking advice and reviewing tax planning throughout the year may help individuals take advantage of tax-efficient opportunities.

WHAT ARE THE RISKS?

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Posted in Taxes, Wealth PlanningTagged deductions, retirement, retirement plan contributions, standard deduction, tax, tax filing, tax planning, taxable income, withholding