Don’t Leave the IRS a Tip: The Importance of Tax Planning and Reviewing Your Return

By Matt Stephens, CFP®

If you’re like most of the population, chances are you only address your taxes during tax season and then put them on the back burner for the rest of the year. However, it’s a fact that creating a strategy to minimize your taxes can be one of the most effective ways to make your money last longer in retirement. By implementing an intelligent tax strategy, you can reduce your tax bill and avoid giving the IRS too much of the income that is yours to keep.

Tax law has similarities to a game, and knowing all the rules will improve your chances of winning—which is reducing your lifetime tax bill and paying less over time.

Build a Tax-Efficient Retirement Plan

When working with your financial advisor, retirement planning will often be a key point of conversation. By stress-testing your plan, you can quickly see if your current retirement accounts, savings rates, and other assets will be adequate for the retirement lifestyle you desire. A direct way to reduce your tax bill is to contribute money into tax-deferred savings accounts, such as a 401(k) or IRA. But, in order to maximize your savings, you will need to determine both your current cash flow needs and your ideal retirement income. A proper financial plan will look at both factors and determine the best way to use your tax-deferred savings accounts to save you money both now and in the future.

For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability.

Contribute to Your Health Savings Account

Health savings accounts (HSAs) offer triple the tax savings. This may sound too good to be true, but HSAs have no federal income tax, no state or local taxes, and no Federal Insurance Contribution Act (FICA) taxes. If you are eligible for an HSA, your money will be tax-deferred and can be withdrawn tax-free to pay for medical expenses.

Because HSA account balances roll over from year to year, by contributing to the limit each year, you can build up quite a nest egg to cover either current medical expenses or future medical expenses in retirement. Think of it as a Roth IRA for medical expenses.

As of 2023, HSA owners now have higher contribution limits to help them do just that. If you have individual coverage, you can contribute $3,850; for family coverage, the limit is $7,750. There is also an extra catch-up contribution of $1,000 available for those age 55 and older. If you can’t max out the yearly limit, attempt to contribute enough to cover your deductible and take advantage of your employer match, if available.

Use a Roth IRA to Transfer Wealth

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs), tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs. Although Roth IRAs don’t have RMDs, other accounts like a traditional IRA might. This will force you to increase your income and could bump you up to a higher Medicare range, which can add $100 to $150 each month in premiums.

You probably know the effects taxation can have on your assets and the inheritance you hope to pass on to future generations. For example, if you passed down a traditional IRA, non-spouse beneficiaries used to be able to stretch the distributions from that account over the beneficiary’s life, but now they have to liquidate the account within 10 years of inheriting it (with some exceptions), thanks to the new SECURE Act. This significantly decreases the value of the account due to the amount of taxes paid in a short time. But, if you pass down a Roth IRA instead, there is no income tax due on the distributions, as long as the account is held for more than five years and the account holder is 59½ or older.

If you have traditional IRAs already or earn too much to qualify for a Roth IRA, consider a Roth conversion to remedy the tax loss. The basic process to convert your IRA is to withdraw the amount you’d like to invest in a Roth, pay the tax owed on the distribution, then reinvest it into a Roth account. Be sure to work with a professional to determine the best time to do this so you don’t push yourself into a higher tax bracket or are forced to use funds from the account to pay the extra taxes on the distribution.

Deduct Eligible Charitable Contributions

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction. Under the Tax Cuts and Jobs Act, fewer taxpayers itemize deductions due to the doubling of the standard deduction. Regardless, charitable giving is still a useful tax-minimization strategy.

In order to benefit from charitable giving, you’ll have to plan ahead. With the new higher standard deduction, you’ll need to make sure your total deductions for the year, giving included, exceed $13,850 for an individual filer and $27,700 for those married filing jointly. If your deductions fall below this amount, consider bunching your giving or doing several years’ worth of giving in one year.

You may also want to look into using a donor-advised fund to combine all charitable contributions in a year and then distribute the funds to various charities over several years. With this strategy, you may be able to itemize deductions in one year and take the standard deduction in the following years so you can achieve a tax benefit that you may not have received otherwise.

Review Your Previous Tax Returns

You can learn a lot from the past. Look at your previous tax returns with a professional to search for deductions or credits you may have missed, opportunities to lower taxable income, and plan for the next tax season. Take these factors into consideration when making a tax plan for the future:

Review notable tax law changes for 2023 that may affect you
Review your capital gains and losses
Review your retirement savings options
Consider Roth IRA conversions
Consider additional year-end tax strategies
Understand potential tax law proposals

Let Us Help You Make the Most of Your Taxes

Collaborating with an experienced professional can not only help you understand the nuances of specific tax-saving strategies, but it can show you which choices align with your long-term objectives. The knowledge and advice they have has the potential to reduce your expenses, both now and in the future.

At AdvicePoint, our team has years of experience in financial and tax planning, allowing us to implement suitable tax-minimization tactics that can assist you in keeping more of your hard-earned income. If you’re uncertain about any of these tax strategies and their suitability for you, we welcome you to schedule a 30-minute intro call with me today.

About Matt

Matt Stephens is a financial advisor with AdvicePoint, a financial services firm based in Wilmington, North Carolina, specializing in retirement income planning, tax-reduction strategies, and charitable planning. Matt spends his days guiding clients as they make the leap from career to retirement. He loves simplifying complex financial issues and giving unbiased answers in plain English. His team goes beyond just professional investment management with their client-focused and high-touch approach, building plans as unique as each client.

Matt obtained degrees in business administration and communication studies from UNC-Wilmington, holds the Series 66 Investment Advisor and Insurance Licenses, Chartered Retirement Planning Counselor^SM, CERTIFIED FINANCIAL PLANNER^TM, and Behavioral Financial Advisor^TM certifications, and was a recipient of the 2019 Wealth Management Thrive Award. Outside of work, Matt enjoys spending time with his wife, Brooke, and their two young children. They attend Port City Community Church, where Matt has volunteered since 1999. His favorite pastime is surfing. To learn more about Matt, connect with him on LinkedIn.