Beyond Tax Prep: Why Tax Planning Should Be a Priority
If you’re like most Americans this time of year, you’re gathering forms, receipts, and any other information necessary to file your tax return for 2022. With this year’s tax deadline on the horizon, you may be searching for the best ways to take advantage of available deductions and credits. And, how can you keep the momentum going after Tax Day?
Year-round tax planning, as part of your comprehensive financial plan, can help reduce the pressure you may feel at tax time. Tax planning involves developing and implementing long-term strategies to help ensure you’ll pay the least amount of taxes over your lifetime, rather than in any given year.
As you plan for retirement, tax savings can help your nest egg grow more quickly, enabling you to retire earlier or leave more to people and causes you care about. Here are just a few potential benefits of tax planning:
Cash Flow Planning
Planning cash flow can greatly help reduce the total tax you pay throughout your lifetime. Creating a 20- to 40-year tax cash flow plan may allow you to pull forward income and provide opportunities for IRA to Roth IRA conversions, as well as other bracket-topping strategies. Your advisor, working with tax professionals, will help you monitor and adjust this strategy as tax laws change over the years.
Tax Loss/Gain Harvesting
Tax loss harvesting captures losses on investments that have declined in value and enables you to reinvest in similar asset classes so you can remain properly diversified. This captured loss becomes a future tax asset you can use to reduce gains harvested in future years, offsetting future tax exposure. This provides a tax benefit at no cost to you, and you may carry any additional remaining losses over to future years. Savant actively employs tax-loss harvesting as part of our investment management of portfolios. Your advisor can help you with a plan to apply those tax benefits.
Tax diversification keeps retirement savers from putting all their eggs in one type of tax basket and can help make their assets last longer. It can also provide options for how and when to withdraw your funds in retirement. Tax diversification involves using a variety of investments with different tax treatments, including tax-advantaged, fully taxable, and tax-free, to help you optimize the taxes you owe now and will owe in retirement. This is also an important consideration in cash flow planning.
QCDs and Donor-Advised Funds
For the charity-minded, both Qualified Charitable Distributions (QCDs) and donor-advised funds present tax-wise ways to support your favorite causes. IRA owners can reduce their taxable income from required minimum distributions (RMDs) by gifting in the form of a QCD. This lowers their adjusted gross income, which can reduce their income taxes.
A donor-advised fund allows you to make a tax-deductible donation of cash, stocks, or other assets into an investment fund, where they can grow tax-free until you recommend a grant to the IRS-qualified charity or charities of your choice. You take a tax deduction in the year you contribute to the donor-advised fund, even if you choose to distribute the money later.
This is intended for educational purposes only. You should not assume that any discussion or information contained in this document serves as the receipt of, or as a substitute for, personalized investment advice from Savant. Please consult your investment and tax professional(s) regarding your unique situation.