Tax Planning Strategies

Year-Round Tax Planning

Many people think about taxes only during filing season, but the most effective tax planning happens throughout the year. By making tax-aware decisions year-round, you can minimize your tax liability while maximizing your savings and investments.

Why Tax Planning Matters

Proactive tax planning can:

• Reduce your overall tax burden
• Help you avoid unexpected tax bills
• Maximize tax-advantaged savings opportunities
• Create more financial resources for your goals
• Provide peace of mind by reducing financial uncertainty

Key Tax Planning Strategies

1. Maximize Retirement Contributions

Contributing to tax-advantaged retirement accounts is one of the most powerful tax-saving strategies:

• Traditional 401(k) and IRA: Contributions reduce your current taxable income, and earnings grow tax-deferred.
  • 2025 401(k) contribution limit: $22,500 (plus $7,500 catch-up contribution if age 50+)
  • 2025 IRA contribution limit: $6,500 (plus $1,000 catch-up contribution if age 50+)
• Roth 401(k) and IRA: While contributions are made with after-tax dollars, qualified withdrawals in retirement are completely tax-free.
• Self-Employed Retirement Plans: SEP IRAs, SIMPLE IRAs, and Solo 401(k)s offer even higher contribution limits for self-employed individuals.

2. Health Savings Accounts (HSAs)

HSAs offer triple tax advantages:

1. Contributions are tax-deductible
2. Growth is tax-free
3. Withdrawals for qualified medical expenses are tax-free

For 2025, the HSA contribution limits are:

• $3,850 for self-only coverage
• $7,750 for family coverage
• $1,000 additional catch-up contribution if age 55+

To qualify for an HSA, you must be enrolled in a high-deductible health plan (HDHP).

3. Strategic Timing of Income and Deductions

Consider the timing of both income and deductions:

• Defer Income: If possible, push income into the next tax year if you expect to be in a lower tax bracket. Examples include:
  • Delaying year-end bonuses
  • Postponing business income if self-employed
  • Deferring retirement distributions (if not required)
• Accelerate Deductions: Consider taking more deductions in the current year if your income is higher. Examples include:
  • Prepaying January mortgage payment in December
  • Making charitable contributions before year-end
  • Paying deductible medical expenses before December 31

4. Tax-Loss Harvesting

Tax-loss harvesting involves selling investments that have declined in value to offset capital gains from other investments. This strategy can reduce your taxable capital gains while maintaining your overall investment strategy.

Key points to remember:

• Losses can offset gains dollar-for-dollar
• If losses exceed gains, you can deduct up to $3,000 against other income
• Remaining losses can be carried forward to future tax years
• Be aware of the "wash sale" rule, which prohibits claiming a loss if you buy the same or a "substantially identical" security within 30 days before or after the sale

5. Charitable Giving Strategies

Charitable donations can provide tax benefits while supporting causes you care about:

• Bunching Donations: Consider "bunching" multiple years of donations into a single tax year to exceed the standard deduction threshold.
• Donor-Advised Funds: Contribute to a donor-advised fund to receive an immediate tax deduction, then distribute the funds to charities over time.
• Qualified Charitable Distributions (QCDs): If you're 70½ or older, you can make tax-free distributions directly from your IRA to qualified charities (up to $100,000 annually).
• Donating Appreciated Securities: Donate long-term appreciated stocks or other securities to avoid capital gains taxes while receiving a deduction for the full fair market value.

Special Tax Planning Considerations

For Parents and Families

• Child Tax Credit: Up to $2,000 per qualifying child under 17, partially refundable.
• Child and Dependent Care Credit: For eligible child care costs for children under 13 or disabled dependents.
• 529 College Savings Plans: Contributions aren't federally tax-deductible, but earnings grow tax-free when used for qualified education expenses. Many states offer state tax deductions for contributions.
• Coverdell Education Savings Accounts: Contribute up to $2,000 per year per beneficiary; funds grow tax-free when used for qualified education expenses.

For Self-Employed Individuals

• Home Office Deduction: If you use part of your home regularly and exclusively for business, you may be eligible for this deduction.
• Qualified Business Income (QBI) Deduction: Allows eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income.
• Business Vehicle Expenses: Choose between the standard mileage rate or actual expenses method for business vehicle use.
• Self-Employed Health Insurance Deduction: Deduct premiums paid for health insurance for yourself, your spouse, and dependents.

For High-Income Earners

• Tax-Efficient Investing: Consider municipal bonds (tax-exempt interest), tax-managed funds, and exchange-traded funds (ETFs) with lower tax consequences.
• Backdoor Roth IRA: If your income exceeds the limits for direct Roth IRA contributions, you might be able to use the "backdoor" strategy by making non-deductible traditional IRA contributions, then converting to Roth.
• Alternative Minimum Tax (AMT) Planning: Be aware of potential AMT exposure and plan accordingly. Common AMT triggers include large capital gains, exercising incentive stock options (ISOs), and high state/local taxes.

For Retirees

• Required Minimum Distributions (RMDs): Plan for RMDs, which generally begin at age 73 (for those turning 72 after December 31, 2022). Failure to take RMDs can result in a 25% penalty on the amount not distributed.
• Strategic Withdrawals: Plan the ordering of withdrawals from different accounts (taxable, tax-deferred, and tax-free) to minimize lifetime taxes.
• Social Security Taxation: Up to 85% of your Social Security benefits may be taxable depending on your "combined income." Strategic withdrawals can help manage this tax exposure.

Tax Planning Calendar

• January - March
  • Gather tax documents
  • Max out previous year IRA contributions (until April 15)
  • Fund HSA for previous year (until April 15)
  • Review previous year's tax situation
• April - June
  • File tax return or extension by April 15
  • Adjust withholding if needed
  • Begin implementing current year tax strategies
  • Make Q1 and Q2 estimated tax payments if needed
• July - September
  • Conduct mid-year tax review
  • Check progress toward retirement contribution goals
  • Begin tax-loss harvesting if applicable
  • Make Q3 estimated tax payment if needed
• October - December
  • Final opportunity for tax-loss harvesting
  • Make year-end charitable donations
  • Take required minimum distributions (RMDs)
  • Max out retirement plan contributions
  • Implement any year-end income deferral or deduction acceleration strategies
  • Make Q4 estimated tax payment if needed

Tax Planning Checklist

• Max out retirement plan contributions

  Traditional 401(k), Roth 401(k), IRA, SEP, SIMPLE, etc.

• Fully fund HSA if eligible

  Consider investing HSA funds for long-term growth if your provider allows it.

• Review tax withholding

  Adjust W-4 to avoid underpayment penalties or large refunds.

• Harvest investment losses

  Offset capital gains and up to $3,000 of ordinary income.

• Optimize charitable giving

  Consider bunching donations, donor-advised funds, or QCDs.

• Review estate planning

  Ensure wills, trusts, and beneficiary designations are up to date.

• Consider Roth conversions

  Especially in lower-income years or during market downturns.