While it’s always a good idea to consider taxes whenever you make financial plans, the end of the year is the perfect time to start actively preparing your finances for tax season. You won’t be filing your return for another few months, but now is your chance to do what you can to minimize your tax burden for the year. 

At Guiding Wealth, we know that everyone’s financial situation is unique. Whether you’re already retired or getting ready for that transition, you can benefit from thorough tax planning. It’s essential to review your charitable contributions, retirement accounts, and prior tax returns. A skilled financial advisor can help you figure out the best way to lessen your tax liability.

Revisiting Your Tax Returns

One of the best ways to prepare for the next tax filing is to review your previous returns. This step is especially important this year with all the recent tax changes and special circumstances. For example, COVID-19 relief measures may have dramatically affected your financial situation. Maybe you ended up getting some extra unemployment money or tax credits. 

You might have had the opposite experience. If you are a business owner or landlord, some of the COVID-related tax bills may have negatively affected your bottom line. Either way, reviewing your previous tax returns can help you get a good idea of what to expect this year. You may be able to find some things you can change for a more favorable result.

Finding Tax Opportunities in Financial Losses

The pandemic hit most people hard financially. Many employees, retirees, investors, and business owners lost a significant amount of income, wealth, or assets. Some people had to close their businesses or significantly change their operations. Even without a global pandemic, some years just end in financial losses.

While looking at your finances and seeing a reduction in your assets isn’t fun, there is a potential upside. Financial losses can be turned into tax opportunities, and sometimes these losses can be carried forward into future tax years. Capital loss rules can be complicated, so it’s best to work directly with your financial advisor and CPA to figure out the best way to apply those losses to your future tax returns.

Understanding the Benefits of a Roth Conversion

If you have a lot of money in your retirement accounts, you may want to consider a Roth conversion. Roth IRAs offer many advantages, most notably that they are tax-free in terms of growth and withdrawals. Once your money is in a Roth IRA, you don’t have to pay taxes on the interest you earn. When you withdraw from it during retirement, that income is tax-free as well.

The 2019 SECURE Act made this type of retirement account even more potentially beneficial. Under this new law, beneficiaries of a traditional IRA are required to receive the entire amount within 10 years. This means that if you leave your IRA to your heirs, they may end up paying more in taxes over those 10 years because of the increased income from the IRA distributions.

However, while you have to take distributions from inherited Roth IRAs, you (or your beneficiaries) don’t pay taxes on the money you take out of the account.  It can also lessen the potential tax burden for your heirs. You will have to make a one-time tax payment on the money you convert to a Roth, so it’s important to initiate the conversion when you are sure you can afford the tax bill.

Making a Plan for Charitable Giving

Another type of tax-saving opportunity is based on charitable giving. Most charitable contributions are tax-deductible, which can significantly lower your tax bill. Giving money to a cause or organization you care about provides emotional and mental health benefits and helps you save money when it’s time to file your taxes. If you’ve had a high-income year, it’s an especially great time to consider making some charitable contributions.

Reviewing Your Employee Benefits

If you haven’t yet retired, another part of tax planning is reviewing your employee benefits. If your company offers a 401(k) matching program, it’s a good idea to make sure you are taking advantage of it. If you are self-employed or managing your own IRA, you can check to see if you are contributing as much as possible. Maxing out your retirement contributions can lower your tax liability while simultaneously building up your retirement account.


Thorough Tax Planning Offers Many Advantages

Preparing and filing your taxes may not be fun, but with a little planning ahead, you can minimize the amount you have to pay. Tax planning can also help you set up your finances in a way that lowers your heirs’ tax liability as well. By reviewing your retirement accounts, charitable contributions, and previous tax returns now, you can make any necessary changes before the end of the year.

If you want to talk through your finances with an expert, contact us at Guiding Wealth. We can discuss your retirement plans and help you make the right financial moves to grow your wealth while lowering your tax burden. Get started with our free resources, and then contact us online or call 214-810-3835 to schedule a consultation.