Tax Planning and Preparation for Individual and Business

Tax planning is the proactive analysis of your financial situation to minimize your tax liabilty and maximize tax breaks within legal boundaries. It is an essential component of comprehensive financial planning and is a year-round activity, not just a once-a-year during tax season.

Strategies of individuals

  • Maximize tax-advantaged accounts: Reduce your taxable income by contributing the maximun allowable amount to retirement plans like a 402(k) or a traditional IRA. Health Saving Accounts (HSAs) and 529 college savings plans also offer tax benifits for specific purposes.
  • Utilize Roth conversions: Consider converting a traditional IRA to a Roth IRA. While you will pay income tax on the converted amount, future qualified withdrawals are tax-free. This can be strategic if you anticipate being in a higher tax bracket in the future.
  • Manage your tax bracketIn a progressive tax system, your tax rate increases with your income. Strategic timing of income and expenses can help keep your taxable income in a lower bracket. For example, if you anticipate a lower income next year, you could defer some of this year's income.
  • Know your deduction and credits:Understand the difference between tax deductions, which lower your taxable income, and tax credits, which provide a dollar-for-dollar reduction of your tax bill.
    • Standard vs. itemized deduction:Choose the greater of your itemized deductions or the standard deduction for your filing status. Common itemized deductions include mortgage interest, property taxes, and charitable donations.
    • Bunch deductions:You can "bunch" certain expenses, like charitable donations or medical costs, into a single year to exceed the standard deduction threshold and itemize.
  • Optize investment taxes:
    • Asset location:Place investments that generate ordinary income, like bonds, in tax-deferred retirement accounts. Hold non-income-producing assets, such as growth stocks, in taxable accounts.
    • Tax-loss harvesting; Sell investments at a loss to offset capital gains, which reduces your overall tax burden.
  • Plan charitable giving strategically:
    • Qualified Charitable Distributions (QCDs): f you are age 70½ or older, you can donate up to a specific amount directly from your IRA to a qualified charity. This donation counts toward your Required Minimum Distribution (RMD) and is not included in your taxable income.
    • Donor-Advised Funds (DAFs): Receive an immediate tax deduction by contributing to a DAF, then recommend grants to charities over time.
  • Adjust paycheck withholding Use the IRS Withholding Estimator to ensure you are not over- or under-paying taxes throughout the year. An unexpected tax bill or large refund can be a sign that you need to adjust your withholding with a new Form W-4.

Strategies for business owners

  • Choose the right business structure: Your business entity (e.g., sole proprietorship, LLC, S-corp, or C-corp) determines how your income is taxed. For example, LLCs can elect to be taxed as pass-through entities, avoiding corporate income tax.
  • Time income and deduction: Use cash- or accrual-basis accounting to defer income or accelerate expenses, which can reduce your taxable income in the current year.
  • Deduct all eligible expenses: Keep detailed records of all business-related expenses. Common deductions include:
    • Home office expenses: Deduct a portion of your rent or mortgage, utilities, and other related costs if you have a qualifying home office.
    • Vehicle expenses: Choose between the standard mileage rate or deducting actual car expenses for business use.
  • Maximize retirement contributions: Contribute to retirement plans like a SEP IRA or a Solo 401(k), which offer higher contribution limits than traditional IRAs.
  • Hire family members: Paying a reasonable salary to a spouse or children for legitimate work can be a deductible business expense. It can also help shift income to family members who may be in a lower tax bracket.

Estate and gift tax planning

  • Understand exemptions:Be aware of the federal gift and estate tax exemption amounts, which are substantial but can change over time. The 2017 Tax Cuts and Jobs Act exemption is set to sunset after 2025, potentially reducing the exempt amount.
  • Use annual gift exclusions: In 2025, individuals can gift up to $19,000 per person per year without triggering gift tax or using up their lifetime exemption. Married couples can double this amount.
  • Establish trust: Use irrevocable trusts to transfer assets out of your taxable estate while maintaining some control over them. A revocable living trust can help avoid probate but does not reduce estate taxes.
  • Leverage the marital deduction: Use the unlimited marital deduction to transfer assets to your spouse tax-free.
  • Consider charitable strategies: Designate a charity as the beneficiary of a retirement account to remove the assets from your taxable estate. You can also establish a charitable remainder trust, which provides income for life while reducing your taxable estate.