Tax Planning Strategies To Reduce Your Taxes

Believe it or not, tax planning can be for everyone. Proper tax planning now could result in tax savings in current and future years. While some strategies can be rather complex, there are also some tax planning strategies for high income earners and lower income earners that you can utilize during the tax year and now to reduce your taxes.

Keep reading to learn some strategies for tax planning, and why you should make it a priority this tax season—whether you’re filing as an individual, a business owner, or both.

1. Keeping Track of the 2022 Bear Market

A bear market is when a market experiences prolonged price declines. It typically describes a condition in which prices fall 20 percent or more from recent highs, amid widespread pessimism and negative investor sentiment.

But did you know that a bear market could be your opportunity to offset some of your capital gains when prices drop? You can also lower your taxable income with some of your losses. 

Additionally, tax loss harvesting is a positive investment tactic that can be done during a bear market. It’s also beneficial for increasing overall portfolio efficiency and saving tax dollars. 

To take advantage of the 2022 bear market, consider the following:

1. Ask your financial advisor for a year-to-date realized and unrealized gain/loss report for your investments. 
2. Prepare preliminary tax projections with your tax advisor. Then, decide whether to accelerate or defer capital gain or losses income and expenses.
3. Ensure that your asset allocation still aligns with your goals by reviewing your portfolio with your financial advisor(s).

2. Consider Converting From Traditional IRA to Roth IRA

With a Traditional IRA, your money grows tax-deferred when you contribute before or after-tax dollars. Additionally, withdrawals are taxed as current income after the age of 59. 

However, with a Roth IRA…

• you contribute after-tax dollars
• your finances grow without tax
• you can generally make penalty-free withdrawals after age 59. 

The main benefit of a Roth IRA is that you’ll have assets that won’t be taxed. This allows you to better manage your tax brackets and participate in more personalized tax planning during retirement. 

Simply put—a Roth IRA allows you to enjoy tax-free withdrawals if you expect to be in a higher marginal tax bracket in retirement. Therefore, it might be smart to consider that route now to help yourself in the future.

Note: The income ranges for determining eligibility to make deductible contributions to traditional Individual Retirement Arrangements (IRAs), to contribute to Roth IRAs, and to claim the Saver’s Credit all increased for 2023. Learn more here.

3. Partake in Like-Kind Exchanges

A like-kind exchange is defined as the process of exchanging real property, used for business or held as an investment for other business or investment property, that is the same type or “like-kind.” These exchanges have been permitted under the Internal Revenue Code. 

There are many benefits to like-kind exchanges, such as tax-deferral of capital gains, more money to reinvest, and no limit on the number of exchanges.

Here are some tips to get the best out of like-kind exchanges:

Trade up in value (or stay at the same level!)

This ensures that the gain is deferred.

Reinvest all proceeds to keep debt at the same level or higher 

Extra cash to you + less debt = taxable gains.

Use a reputable qualified intermediary to complete the transaction

Don’t attempt to save money and do it yourself, or ask your attorney to do it. The IRS may challenge it, which means that you could pay tax on the gain now. 

Pay attention to deadlines for completing the exchange

You have 45 days to identify replacement property and 180 days to complete the transaction. Missing either of these will result in taxable gain.

4. Plan Around Big Life Changes

There are many big changes that happen in our lives every year. However, they can affect how you pay your taxes. 

Here is a tax checklist to follow to plan around some common life events: 

Marriage

• Change your IRS filing status
• Take note of your new standard deduction
• Consider adjusting your paycheck withholding 
• Learn about the marriage “penalty” and “bonus” as well as other aspects of taxes and marriage
• Change your name and/or address with the IRS and Social Security Offices

Divorce

• Learn about child support, alimony payments, and taxes, or help with an absent parent
• Check if you qualify for Innocent Spouse Relief or Injured Spouse Allocation
• Inquire about who gets to claim the dependents
• File your name change and/or change of address (if applicable) 

Having Children

• See if you qualify for a larger earned Income Tax Credit
• The Child and Dependent Care Tax Credit is specifically geared towards the parent(s) who work and often pay for childcare; both can be claimed. Learn more about child and dependent care expenses by reading IRS Publication 503, Child and Dependent Care Expenses
• Learn about child tax deductions that you may be eligible for
• Find information on taxes for your children during summer break, including summer camp or a job

5. Income Shift Your Tax Strategy

Another useful tax planning strategy is income shifting. This is a huge component in tax planning strategies for high income earners. Income shifting is defined as the transfer of money within a business or between family members with the purpose of decreasing tax liability or adjusted gross income.

Additionally, income shifting reduces the tax burden by moving income from a high to a low tax rate. This strategy has been used for generations to legally shelter income from taxation.

Here are a just few ways that you can execute this strategy:

1. Hire your kids to work in your business to deduct their salaries from your business income as a business expense. The key benefit to this is that kids fall under a lower tax bracket. Therefore, they may not have to pay taxes if what you’re paying your kids does not exceed the standard deduction. 
2. Defer end-of-year bonuses. You can do this by deferring a bonus to a tax year when you’re in a lower tax bracket. 
3. If you’re a business owner and report your income on a cash basis, consider holding off on issuing those year-end invoices until the first of the year. However, you should only do this if you expect to pay less in taxes next year. On the other hand, you could also request your customers to prepay for the following year’s services, if you expect to pay less in taxes this year. 

6. Time Large Business Purchases Strategically

Did you know that you can minimize business taxes year-to-year by considering when to make big purchases, such as machinery or vehicles? 

In fact, timing your large business purchases increases expenses and tax deductions while postponing receipts to create income at the end-of-the-tax year.

The bottom line? You should move income into a year of lower taxes, and expenses into a year of higher taxes. 

Let Us Help You Plan For Your Tax Return

Tax planning can be tricky, but when done correctly, it can have many benefits. Contact us, so we can connect you with an expert to help you strategize your tax planning process today!