How to Take Advantage of Tax Planning Options
Posted on: 30 December 2020
Tax planning is a process where you try to minimize what you pay and maximize the available long-term benefits. It requires a solid understanding of how the system works, and it's wise to ask a tax planning services professional for guidance. Here are four ways you may be able to take advantage of some options.
Fully Funding Retirement Accounts
A traditional 401k plan is the standard vehicle for gaining tax preference later in life. Generally, people are making less income in their retirement issues, and that means withdrawal from accounts in those years are usually at lower rates. Likewise, you can take a tax deduction for your contributions now. That means you save on your taxes today, and when you do claim the contribution as income after the age of 59 1/2, you'll pay less later, too.
Similarly, you can plan your withdrawals well into your retirement years. This can make it easier to understand how much money you'll have in addition to Social Security income.
Annual Changes
Congress makes many changes to the tax code each year, and a tax planning services firm can help you keep up with them. If there is a specific benefit in its last year, for example, a professional can help you decide whether to speed things up to take advantage of it. Similarly, they can clue you in on new benefits that may appear each year.
For example, tax reforms that hit in January of 2018 prevented divorcing spouses from deducting fees and expenses from their divorces. On the advice of their attorneys and tax planning professionals, many folks preparing for divorce at that time elected to accelerate the process to claim the deduction.
Taking Losses on Investments
No one wants to eat a loss on an investment, but there are tax planning advantages that can soften the blow. If you're facing a capital gains tax bill from profits you've made in the stock market, for example, you may want to sell some of your losing bets. Not only does this allow you to rebalance your portfolio, but you can offset the profits by realizing the losses. Especially if you turned a profit, such as selling a growth stock a couple of months after you bought it, this can help you minimize the impact of short-term capital gains taxes.
Credits
If you're doing something like a home remodeling project, it's wise to think about the tax planning implications. You might be able to claim credits for installing energy-efficient windows, for example. You get the credit and save on your long-term energy bills.
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