Tax season is upon us, and whether you dread or welcome this time of year, there’s no doubt that finances are top-of-mind for American households as spring approaches. Although tax return preparation takes place by April 15 (for individual income taxes without an extension),tax planning is an activity that can be conducted year-round to ensure you aren’t paying more taxes than you need to.
Tax planning is most effective when your financial advisor and tax professional work together, analyzing your complete financial picture to recommend short-term strategies (like deductions and credits) or long-term approaches (like tax-advantaged investments or charitable giving vehicles) that minimize your tax liability.
When your financial advisor collaborates with your tax professional, it can produce important financial opportunities for your family. Here’s how:
- Take full advantage of your income tax bracket. In the United States, the more income you earn, the higher tax rate you’ll pay on additional income. Leaving money in the lower part of your tax bracket could mean missed opportunities to reduce your overall tax burden, especially if you expect to be in a higher tax bracket in the future due to increased income or changing tax laws. Additionally, many tax credits and deductions phase out as income increases, so it’s important to take full advantage of the benefits your current tax bracket provides.
- Ensure your investments are tax efficient. Depending on your financial goals and unique circumstances, a combination of tax-advantaged investment accounts and tax-deferred growth options can help optimize what you owe. The location of your assets has a big impact on your tax efficiency, but so does the active monitoring and recalibration of investments over time. By collaborating, financial advisors and tax professionals can help you avoid common pitfalls like paying unnecessary capital gains taxes on the growth of your investments.
- Optimize how you’re saving for retirement. Retirement savings vehicles have varying tax advantages and requirements. Converting a traditional IRA to a Roth IRA, for example, can allow you to pay taxes at a lower rate today and grow retirement accounts tax-free in the future. However, the best methods to save for retirement depend on factors such as your age, current and future income, and more, which is why it’s important to discuss them with an advisor who understands taxes.
- Minimize future estate taxes. The transition of your estate is a key part of maximizing the impact of your life and legacy. Estate taxes can be sizable, and laws related to their exemptions and provisions change regularly. Your financial advisor and tax professional can leverage charitable giving, trusts or other estate strategies to minimize the aspects of your estate subject to high taxes.
- Anticipate tax implications of financial decisions. Nearly every financial action has a corresponding tax-related reaction, many of which can be avoided merely by proper timing or good communication. If your financial advisor and tax professional are not collaborating on your behalf, you could experience unintended tax consequences simply by the left hand not knowing what the right hand is doing, so to speak.
At the end of the day, it’s not how much you earn but rather how much you keep as after-tax income that enables you to create memorable experiences, build meaningful relationships and extend the impact of your life and legacy. When taxes are one of the largest expenses incurred throughout a lifetime, it’s essential that your financial advisor and tax professional collaborate, so you can take advantage of available benefits.