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Save Money by Planning Year-round

Stepping back and looking at the big picture to see what you can do differently may change the outcome on your future tax returns and ultimately help you to achieve your life goals sooner. Some strategies are short-term (e.g., fix withholding, document deductions) while others are long-term (e.g., setting up a new retirement plan or making the most of your HSA). Your CPA financial planner can help you plan for major financial events while also ensuring you’re minding the tax consequences of various decisions.

Meeting your personal financial goals

Whether you want to buy a home, get on track for retirement, start a business, pay off debt or save for college, a CPA can help you achieve your most important life goals with a realistic budget that fits your income, expenses, dreams and obligations.

Your CPA can:

  • Suggest practical savings and investment strategies that will help you stay within your budget, make the most of your financial strengths and work to overcome any weaknesses in your money situation.
  • Help you craft a budget that is flexible enough to accommodate the good, the bad and the unexpected in your personal and professional life.
  • Help monitor and revise your budget as necessary so you can create a system that meets your goals as well as your lifestyle.
  • Improve your peace of mind about your financial health as you deal with life’s uncertainties.

Saving on taxes through proactive planning

Here are a few ideas to consider if you are looking for additional ways to lower your tax bill.

Postpone your income to lower this year's tax bill

If you expect to be in a lower tax bracket next year (or in the future, when making retirement account withdrawals), then postponing when you claim income as earned when possible can lower the overall taxation of that income. Here's how it works.

Postponement of income is the idea behind many retirement plans. For example, with a pre-tax 401(k) or traditional IRA, you contribute part of your salary into the plan rather than receive it, then pay income taxes on that money when you withdraw in the future. The thought is that you may be in a lower tax bracket than when you earned the money, and therefore lower your lifetime taxes.

In the meantime, as your investments grow, you benefit from deferring the taxes on that as well. (Remember that withdrawals before age 59½ may be subject to a 10 percent penalty and may be taxed as ordinary income in the year you make the withdrawal, so you only want to put money away that you can let stay in those accounts until at least age 59 ½).

Besides saving into a retirement plan, there are many other ways to postpone your taxable income such as buying permanent life insurance (because the cash value part grows tax-deferred), or investing in certain savings bonds. If you are looking for other creative ways to postpone income, it's a good idea to talk to a CPA financial planner as well.

Shift income to family members

This idea does mean you have to give some of your income away, but if you're ok with that, here’s an example of how it works: Let's say you own stock that that pays a high dividend, and you are in a high tax bracket. One way to lower the taxes you pay on the dividends is to give the stock to your children, who are in a lower bracket and have them pay taxes on that income.

One caveat to keep in mind though is kiddie tax: If the dividend income is significant, this approach could trigger the kiddie tax, which applies to a child’s unearned income over a certain amount and basically applies the parents' tax rate to the child's investment income. Also, be sure to check the laws of your state before giving securities to minors. Your CPA can help you determine if this method would work according to your circumstances.

Other ways of shifting income include hiring a family member for the family business and creating a family limited partnership. Investigate all of your options before making a decision and make sure you are clear on any rules that apply to these unique circumstances – your CPA can help you navigate the regulations to ensure you’re making the most of these strategies.

Time your deductions

One of the biggest changes to the tax law in 2018 was doubling the standard deduction, while also limiting the amount that itemizers can deduct for state and local taxes paid – many people who used to itemize no longer see the value as the standard deduction exceeds their itemized deductions.

If you're on the cusp, then it might make sense to consider "lumping" your deductions into one year, so that one year you'll have more than enough to itemize, while the following year you take the standard deduction.

If your income fluctuates, then it makes the most sense to take more deductions (and therefore itemize) during the higher-earning year, while postponing deductions during the year you'll have lower income.

With investment tax planning, use timing strategies and focus on your after-tax return

Investment tax planning seeks to lower your overall income tax burden through wise investment choices over the years. Strategies include investing in tax-exempt securities and timing the sale of capital assets properly.

While most forms of income are taxable, some investments can generate tax-exempt income. For example, the interest on certain Series EE bonds used for education may be exempt from federal, state, and local income taxes (tax-exempt status applies to income generated from the bond; a capital gain or loss realized on the sale of a municipal bond is treated like any other bond for tax purposes).

You can also exclude the interest you earn on municipal bonds from your federal income, although some municipal bond income may be subject to the federal alternative minimum tax. With tax-exempt bonds issued in your home state, the interest will generally be exempt from state and local tax as well.

When comparing taxable and tax-exempt investments, include the benefit of maximizing your after-tax return in your consideration.

Focus year-end planning on your marginal income tax bracket

Year-end tax planning in November or December involves timing your income so that it will be taxed at a lower rate and claiming deductible expenses in years when you are in a higher income tax bracket. This usually means postponing income to a later year and accelerating deductions into the current year. For example, assume it's December and you're entitled to a year-end bonus, but you're in a higher tax bracket this year than you expect to be in next year.

The solution? Ask your employer to pay the bonus in January of next year rather than now so you can postpone the taxable income.

In another situation, say you’re in a high tax bracket this year and are scheduled for major dental work in January. See if you can move the surgery up into this year so you can take the medical expense deduction now (assuming it will exceed 7.5% of your Adjusted Gross Income).

In both cases, the opposite would be true, of course, if you expect to be in a higher tax bracket next year. Long-term capital gains may also be worth accelerating or postponing, depending on your overall tax situation. 

Keep the conversation going with your CPA

The bottom line is that proactive planning for your life goals involves year-round conversations with your CPA or your CPA financial planner. Make the most of this valuable relationship by engaging with your CPA outside of tax season – the return on that investment isn’t just lower taxes, it’s peace of mind and the possibility of achieving your goals even sooner.