Once you’ve checked your tax return off the list for the year, it can be tempting to check out and enjoy your hard-earned income. As much as we’d all enjoy a long break from thinking about taxes, the truth is that it’s time to start tax planning for next year. By starting to plan now, you not only avoid the shock of a tax bill, but you’ll also be better positioned to make proactive moves that can help reduce your tax burden. There’s a big difference between tax planning and tax return preparation, so it makes sense to start earlier rather than later in the year.
Who can benefit most from an early tax planning strategy?
Although most individuals can benefit from having a tax planning strategy, it is especially important for:
- Business owners
- Self-employed individuals
- Investors significant unrealized losses or profits
- Individuals who have bought health insurance from the government health exchange
- Taxpayers with a major life-changing event during the year, such as selling a home, getting married, or having a child
- Couples going through a divorce, as the terms of the divorce can have lasting tax consequences that should be understood prior to the settlement
- People who have moved between states during the year, or plan to do so
- Parents sending their kids to college for the first time
When should I start tax planning?
We say that it’s never too early to start your tax planning. At a minimum, it’s wise to seek a tax projection for the year in early October or November. For individuals with a complicated tax situation, business owners, or anyone with a 401(k) other type of retirement plan with significant tax opportunities, it’s beneficial to start even earlier. Most accounting firms focus on tax planning after the spring deadline to give them enough time to find the right strategies for the new tax year.
3 Benefits of Tax Planning Strategies
1. Pay less tax overall
Perhaps one of the most important reasons to tackle tax planning early in the year is that you have the greatest potential to reduce your overall tax bill. Having a tax plan allows you to forecast your tax liabilities ahead of time so that you can identify strategies to reduce your future taxes. Once you see how much money you can save, you’ll understand why it’s important to plan your taxes earlier.
You can minimize your tax liability and pay less tax by deferring revenue and income and increasing expenses in a number of different ways, such as:
- Increasing expenses like charitable contributions
- Using a 529 plan to save for college education
- Accelerating your retirement plan contributions
- Making strategic investments in your business
- Harvesting losses from investments
These strategies generally require a detailed plan and time to implement, which is why we advise not waiting until December to get started.
2. Implement tax planning ideas
Having a tax reduction strategy ahead of time allows you to take advantage of the credits and deductions available to you. Although you can achieve some strategies within a short time at the last minute before the end of the year, others require more time and planning.
Businesses that want to invest in new projects and equipment as a way to reduce overall tax for the year will need to work those expenditures into their budgets and strategic plans. Read more here about reducing your business tax liability with year-end tax planning.
Planning early also allows you to assess potential gains and losses. For example, you can plan to offset potential profits by selling your investments or securities that lack value to lower your overall annual tax.
3. Leverage annual tax changes
Tax laws undergo various changes every year, some of which can be significant, such as the American Rescue Plan of 2020/2021. It’s crucial to stay informed about expiring laws or newly implemented laws so that you can plan to leverage the changes: maybe it’ll be beneficial to delay something until the next law takes effect, or perhaps you can take advantage of a certain law before it expires. Subscribe to our mailing list as a way to stay on top of legislative news that may impact your tax strategy.
Start now with expert help to develop your tax planning strategy
An effective tax plan can help you offset your tax burden and boost your tax efficiency. However, you can only develop a strong tax planning strategy if you start early—not as the year draws to a close.
Even if you start your tax planning strategy early this year, it’s no simple task to assess your situation and test different strategies. That’s why many businesses and individuals prefer to hire a licensed tax professional. Reach out to our team to schedule a consultation.