Tax Planning Basics: How to Keep More of Your Money

Tax Planning Basics: How to Keep More of Your Money

Taxes are a fact of life, but with the right strategies, you can minimize your tax burden and keep more of what you earn. Effective tax planning isn’t just about preparing for April 15—it’s about making smart decisions year-round to ensure your money is working for you.

In my experience, many clients feel overwhelmed by the complexities of tax laws and unsure of how to optimize their financial strategies. I’ve found that with some basic knowledge and proactive planning, you can make meaningful changes that result in significant savings.

By the end of this article, you’ll understand:

• The key principles of tax planning.

• Common strategies to reduce your taxable income.

• How to take advantage of tax credits and deductions.

• Practical steps to implement tax-saving strategies.

Why Listen to Me?

As a CERTIFIED FINANCIAL PLANNER™ professional, I’ve worked with individuals and families to create tax-efficient financial plans that align with their long-term goals. Investors I’ve worked with appreciate my ability to simplify tax planning and identify opportunities they might otherwise miss.

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Key Takeaways

• Tax planning involves using strategies to reduce your taxable income and maximize deductions and credits.

• Retirement accounts, health savings accounts (HSAs), and charitable giving are powerful tools for reducing taxes.

• Planning ahead can help you avoid surprises and ensure you’re taking full advantage of tax-saving opportunities.

What Is Tax Planning?

Tax planning is the process of evaluating your financial situation to ensure you’re minimizing your tax liability. It’s not just about filing your taxes—it’s about using strategies throughout the year to maximize your savings.


Common Tax Planning Strategies

1. Maximize Tax-Advantaged Accounts

In my experience, one of the most effective ways to reduce your taxable income is by contributing to tax-advantaged accounts.

• 401(k) and Traditional IRA Contributions: Contributions reduce your taxable income for the year.

• Roth IRA Contributions: While not deductible, Roth IRAs offer tax-free growth and withdrawals in retirement.

• Health Savings Accounts (HSAs): Contributions are tax-deductible, grow tax-free, and can be used for qualified medical expenses tax-free.

2. Harvest Capital Losses

If you’ve sold investments at a loss, you can use those losses to offset gains from other investments. Known as tax-loss harvesting, this strategy can reduce your taxable income and help you rebalance your portfolio.

Pro Tip: In my experience, combining this with end-of-year portfolio reviews ensures you’re capturing all opportunities for tax savings.

3. Leverage Tax Credits

Tax credits reduce your tax liability dollar-for-dollar and can often be more valuable than deductions. Common credits include:

• Child Tax Credit

• Education Credits like the Lifetime Learning Credit

• Energy-Efficient Home Improvements Credit

4. Make Charitable Contributions

Charitable giving is not only a meaningful way to support causes you care about but also a powerful tax-saving tool.

• Qualified Charitable Distributions (QCDs): If you’re over 70½, you can donate up to $100,000 from your IRA directly to a charity, satisfying your RMD and reducing your taxable income.

• Bunching Contributions: In my experience, clients who group multiple years’ worth of donations into a single year can maximize their itemized deductions.

5. Optimize Your Filing Status

If you’re married, consider whether filing jointly or separately will minimize your taxes. While joint filing is typically more advantageous, there are scenarios where separate filing makes sense.

Advanced Tax Strategies

1. Roth Conversions

  • Converting a portion of your traditional IRA to a Roth IRA can be a smart move if you’re in a lower tax bracket. While you’ll pay taxes on the converted amount now, the funds will grow tax-free going forward.

2. Manage Required Minimum Distributions (RMDs)

  • RMDs can push you into a higher tax bracket in retirement. Planning ahead with Qualified Charitable Distributions (QCDs) or Roth conversions can reduce the tax impact.

3. Use Tax-Efficient Investment Strategies

  • Tax-efficient investing focuses on holding investments in the right accounts to minimize taxes. For example:
  • Place bonds and dividend-paying stocks in tax-deferred accounts like IRAs.
  • Hold growth-focused stocks in taxable accounts for potential long-term capital gains.
Year-Round Tax Planning Tips

1. Review Your Withholdings

  • In my experience, many people either overpay or underpay their taxes through payroll withholdings. Adjusting your W-4 ensures you’re not giving the IRS an interest-free loan or facing a big bill at tax time.

2. Keep Organized Records

  • Good record-keeping makes tax time easier and ensures you don’t miss out on deductions or credits.

3. Consult With a Tax Professional

  • Taxes can be complex, and the rules change frequently. Working with a professional ensures you’re taking full advantage of opportunities while staying compliant.
FAQs About Tax Planning

1. What’s the Difference Between a Credit and a Deduction?

  • Credits reduce your tax liability dollar-for-dollar, while deductions reduce your taxable income. Credits are often more valuable.

2. How Can I Reduce Taxes in Retirement?

  • Strategies like Roth conversions, QCDs, and managing RMDs can help minimize taxes in retirement.

3. Is Tax Planning Worth the Effort?

  • Absolutely. In my experience, proactive tax planning can result in significant savings, often far outweighing the time and effort required.
Conclusion

Tax planning is one of the most impactful ways to protect and grow your wealth. By maximizing tax-advantaged accounts, leveraging credits and deductions, and planning ahead, you can ensure you’re keeping more of your hard-earned money.

👉 Want to learn how to retire without the worry of running out of money in retirement? Click here to watch this video

Disclaimer: Case studies are hypothetical and do not relate to an actual client of Lock Wealth Management. Clients or potential clients should not interpret any part of the content as a guarantee of achieving similar results or satisfaction if they engage Lock Wealth Management for investment advisory services.