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Spring forward from this tax season with “best practices” for a sunny, year-round financial outlook

Updated: Nov 20, 2023

Another tax season is almost in the rearview mirror. As we are all “springing forward,” O’Donnell, Ficenec, Wills & Ferdig is also looking ahead to the rest of the year and to what the next tax seasons have in store for us. After all, we are fond of saying that taxes are not an “event,” nor are they a specific “time” or “season” to us. But, rather, they represent a year-round, essential “all of the time” activity and effort.


In our ongoing series on tax planning, we are providing you with a glimpse into the ways that minding your taxes can serve your personal and business financial health well – that intersection of tax planning and intelligence to drive better strategies around your wealth management as an individual/family and, as appropriate, around your business.


Calculate your projected tax


We are intentional about maximizing benefits that may be appropriate and relevant to your situation, while also minimizing undesirable surprises. One of the ways that we can avoid unsavory shocks to the system as tax deadlines approach, is to complete a tax projection while there is still plenty of time on your side to identify potential pain points and to make adjustments.


Within the form (1040-ES) for estimated taxes for individuals, the IRS has provided a worksheet to help you determine your tax burden and as a general guide. Recent developments for the latest tax years can also be found here. Generally, estimates or projections are factored from the anticipated AGI (Adjusted Gross Income), taxable income, taxes, deductions and credits in the given year.


It may be handy to use prior-year income, deductions and credits when first embarking on the current year calculations. Keep in mind that such calculations not only aid in getting your personal and professional financial “ducks” in order, but they also help you to duck potentially onerous penalties. Costly penalties may be associated with inaccurate estimates and, accordingly, with not paying enough in tax through withholding and estimated payments, and due to late payments. By getting into a healthy habit and staying ahead of this annual process, you also give yourself plenty of time to account for potentially money-saving changes that are specific to your situation and/or that reflect changes to tax legislation.


When it comes to the second prong of this largely two-pronged mission of maximizing savings while minimizing costly surprises, you may wish to defer or eliminate tax liability through some of the following channels. Opportunities to reduce taxable income and the overall tax burden include:


  • Through making contributions to accounts and plans for retirement savings (the likes of traditional IRAs and 401 (k) plans are tax deductible.

  • With Health Savings Accounts, which provide a trifecta of tax benefits (deductible contributions, tax-free earnings and withdrawals) for eligible, qualifying medical products, supplies and services

  • Similarly, via Flexible Spending Accounts (also for savings on qualifying health care expenses)

  • With 529 plans for higher education, whereby earnings and withdrawals are not taxed for eligible expenses


Don’t lose $$$ over gains


Opportunities to minimize the overall tax burden are presented by minimizing one “corner” of the investing landscape: capital gains, those taxes on investments (such as stocks) that are sold at a profit. Appropriate investment-centric techniques to reduce the tax bill might include exploring:


· As feasible, don’t sell appreciated assets all at once. Spread the sale over a few years, starting with a portion this year and the balance the following year.

· For those children who are not dependents and who are in lower tax brackets, it may make sense to transfer these assets to them to avoid being taxed on the gains at significantly higher rates.

· What charitable cause or organization do you hold close to your heart? Transfer assets to charity. There are two-fold perks here – first, these assets won’t be subject to capital gains taxes at all and, second, it’s likely you can claim deduction (based on Fair Market Value of said assets).

· Cultivate a sound tax savings strategy – with tax-loss harvesting. Now, taking a deeper dive into this approach can get complex fast. So, we encourage you to contact us with questions about tax-loss harvesting. Basically, it’s the process of offsetting capital gains taxes by selling securities at a loss. It can be particularly attractive in an environment characterized by the likes of rising capital gains taxes and historically high inflation.

· Acquaint yourself with Opportunity Zones as an investment tool. You may be able to avoid substantive taxes while also channeling your monies these opportunities to support disadvantaged areas of your community and other “zones.” Recently, we looked at the program through the lens of entrepreneurs within the communities.But you can also find more information through the lens of an investor and the tax benefits here.


Gifting as tax savings channels


By maximizing provisions related to the annual gift tax exclusion, you can minimize your tax burden. This exemption refers to the monies that can be “gifted,” tax-free, on an annual basis. These provisions extend to multiple individuals and you can gift tax-free as long as the transfers do not exceed the exclusion amount ($17K for a single person, $34K for couples in 2023).


Earlier, we referenced charitable giving as a means of shouldering the blow from capital gains taxes; however, it may truly pay off to take a deeper-dive into your strategies on this front. For instance, “bunching” involves making a single large donation in one tax year versus several smaller donations over many tax years. So, that way, you can itemize the deductions and claim the benefit. Alternative options such as donor-advised funds may be appropriate.


A “bunched” donation could be made to a specific fund or account (operated as a 501(c)(3)) with the instruction that the contribution be allocated to a designated charity and spread over a multi-year timeframe. A full review and guide associated with these donor funds has been published by the IRS.


And, we cannot stress this enough, reach out to us! We are here to help. By leaning into our expertise, the onus is not on you to remember all of the deadlines or timeframes to stick to throughout the year as a way of staying ahead of “tax time.” We do the following up as needed, and only as needed.


Furthermore, aside from your being incredibly busy with myriad commitments competing for your precious time, we also understand that taxes are likely not what you do best. We wouldn’t pretend to know your business better than you, though we strive to have a robust understanding of your industry, niche, and team.


Likewise, we don’t expect you to know all of the ever-changing nuances, complexities, regulations, legislation and compliance associated with taxes and related deductions, credits, programs and provisions. It is our job to keep up with these changes, on behalf of our clients, so you get a better “result” – without the sleepless nights!

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