Another tax season has come and gone, and many Americans are asking themselves the same question “is there something else I should be doing to improve my tax situation?” Like many things in life, let’s turn to the classic fable that has been told to children around the world since the 1600’s, The Tortoise, and the Hare.
Slow, steady and without stopping (consistency) tends to lead to the best results in many important aspects of life. Getting in shape, dieting, building relationships, education, career development, investing and tax planning. I often say that tax planning is a lifelong journey because once you start, you will never stop paying taxes and as a result we should be focused on long-term planning. There is often a trade off on paying taxes today, paying taxes later or avoiding them altogether.
Here are a few tips from my 18 years of financial planning experience to focus on when developing your tax planning strategy:
Comprehensive & Consistent Planning – There are tax incentives to help you save for some of life’s most important moments. You should have a good understanding of your tax rate today versus where your tax rate might be when those moments occur. Consider the opportunities available to receive tax-free growth and withdrawals of your money. A few examples would include Roth Retirement Plans, 529 Savings Programs for education, Health Savings Accounts for your future health care needs and life insurance for estate planning needs. You should also consider the opportunities to receive tax deductions today to defer the income taxes you will pay to a future date when you might be in a lower tax rate.
Organization – Before you put away the 2022 tax file, take a minute to summarize the strategies, goals and lessons learned for 2023. Start your 2023 tax file, physical or electronic and put yourself in a better position to reduce stress for next year.
Understand that Tax Rules will Change – Diversification in your strategy is important because tax laws will change over your lifetime. As an example, a retiree with after-tax savings, tax-deferred savings and tax-free savings might be better positioned to address a change in their tax rate.
Don’t let the Tax Tale Wag the Investment Dog – There might be tax benefits available when you put savings into investments or a business. Consider how each strategy effects your ability to build wealth and meet long-term financial goals. There are strategies that might save you a little in taxes today but hurt other areas of your financial plan.
In the Montgomery Group, we believe that a lot of little things, add up meaningful results when consistently implemented over a long period of time. We recommend going through the financial planning process to get organized, working with a CPA when appropriate and being consistent with your behaviors to enjoy the best long-term results.