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The ABCs of Proactive Tax Planning

The ABCs of Proactive Tax Planning
Mariana Battista, CFP®
March 10, 2020

Although not common for most, the start of the new year reminds me of one thing… tax season! With our second post-2018 tax reform around the corner, it’s important to identify and take advantage of proactive tax strategies available. There is never a bad time to prepare for future tax liability. As you begin the start of 2020, consider my “ABCs” of common tax planning tips explained below.

A – Adjust your Withholdings

With the various forms of taxable income – ranging from salaries, to IRA distributions and Social Security benefits – it’s easy to forget to apply an appropriate tax withholding to prevent a large-sum surprise come April the following year. First and foremost, the easiest withholding to review is your salary (elected through you W-4). While most people view this is an ‘elect and forget it’ type situation, there can be many life-changing moments that shine light on the need to update this. Some include getting married, getting a second job, having a baby, etc.

A general ‘rule of thumb’ is to match your withholding rate to your last year’s effective tax rate, assuming no major changes have been made to your taxable income; however, this is a great thing to coordinate between your Financial Advisor and CPA.

B – Benefits, Benefits, Benefits

Proactive tax planning includes syphering through the lesser known tax strategy of utilizing and electing appropriate pre-tax benefits through your employer paycheck. Various opportunities include the traditional 401(k), in which you can defer money pre-tax into a retirement-focused investment account. Although this does not save you money on FICA taxes, it will decrease ordinary income reported on your 1040. Another pre-tax route, and personal favorite, is the Health Savings Account (HSA). Like the 401(k), if your employer offers an HSA, you are eligible to defer money directly from your paycheck, again avoiding reportable income on your 1040.

Various employers offer various fringe benefits, so come open enrollment time, it is always a great idea to review your benefits offered and deferral elections. As a minimum, for a 401(k) deferral, we always recommend that you at least defer up to your employer’s matching amount, if applicable. By doing so, you are taking advantage of the “free money” offered by your employer and saving on your tax bill come April.

C – Charitable Giving

With changes to the standard deduction after the 2018 tax reform, it’s becoming more common that people are now taking the standard deduction instead of the itemizing. Because of this, a new charitable giving strategy has highly been focused on “clumping,” or making a majority of your future intended gifts in one tax year to benefit from the deduction.

The “clumping” charitable amount depends on your filing status, additional itemized deductions (such as medical expenses and mortgage interest deduction) and your overall intent for annual charitable gifts.

Also, as a bonus, if you are over the age of 70 ½, you can utilize the Qualified Charitable Distribution (QCDs), in which you directly transfer funds from your IRA to a qualified charity. By doing so, you avoid counting the distribution as taxable ordinary income. This strategy is most attractive to those who are in the Required Minimum Distribution (RMD) years and do not need the required cash flow.

Preparing and planning for taxes can be an intricate process, especially with those unfamiliar with all the crosspollination between your personal finances; however, by identifying the simple ways to save, you’re setting yourself up for less of a surprise in April! Reach out to your advisor at Atlanta Financial today to see how we can help strategically utilize tax tips that benefit you the greatest!


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