Global View Investment Blog

The Process of Tax Planning: 5 Things You Should Know

Taxes aren’t just important at “tax time.” Tax breaks, tax-saving strategies and tax benefits are also important to consider when establishing, reviewing or changing a comprehensive financial plan, an estate plan and any investment or retirement plans, as they can be a key factor to how much money you have at retirement as well as after you’re gone. The process of tax planning can be complex, but if done right, you can help protect your wealth and stop giving away more than you have to.

The key to minimizing your tax burden is to take advantage of all available income adjustments, tax deductions and tax credits available to you. To do so, you should be familiar with some basic concepts, such as tax brackets, credits versus deductions and standardized versus itemized deductions. Also, it’s important to consider your taxes throughout the year as you make certain decisions, such as when to sell investments or how much to give to charity.

As a paraplanner at Global View since 2008 (and more recently an accountant-Enrolled Agent), I’ve heard many of the same questions when it comes to tax planning. So, I’ve compiled some simple guidelines all investors should know to reduce their tax bill.


Make sure you’re making the right decisions when planning for your future. Contact Global View and take us for a test drive.


1. Understand Tax Brackets

The federal government uses a system of progressive tax brackets to tax individuals and corporations. “Progressive” describes the fact that folks pay progressively higher tax rates as their income increases. Each tax bracket has lower and upper limits and the percentage of your net taxable income that will be taxed increases. Currently, the U.S. tax bracket percentages are between 10 and 37 percent. These percentages apply to your net taxable income, meaning your income after taking all adjustments and deductions. Tax rates also depend on your filing status, such as single or married.


2. Know All Reductions to Your Taxes or Taxable Income

Your annual gross income includes your pay and bonuses (if self-employed, your business income), plus income and profits from investments, as well as Social Security benefits, alimony and rental income. Here are some reductions that you may be able to take advantage of:

  • Prepaid taxes: The U.S. tax system is pay-as-you-go. If you are an employee, your employer withholds a portion of each paycheck and submits it to the IRS as a tax payment. If you are self-employed or have other, non-withheld income, you must submit estimated tax payments in April, June, September and January. Withholdings and estimated taxes are prepaid tax credits and reduce your remaining tax bill, if any, dollar for dollar. Overpayments can be refunded or held over to reduce future taxes.


  • Adjustments to income: Adjustments are expenses you can deduct whether you itemize deductions or not. This can include things like educator expenses, health savings account contributions, certain expenses for members of the armed forces, contributions to IRAs and self-employed qualified plans, student loan interest and self-employed health insurance.


  • Deductions: Deductions reduce your taxable income. You can take the standard deduction, or you can choose to itemize deductions. It pays to figure your taxes both ways to see which results in a lower tax bill. Itemizing might make sense if you pay a mortgage and/or property taxes, state taxes, charitable contributions, business expenses and/or medical bills. After the tax changes for 2018, a lot of taxpayers' standard deduction is higher than their itemized deductions.


  • Credits: Besides prepaid taxes, other tax credits that can reduce your tax bill dollar for dollar include the earned income tax credit, child-related tax benefits and education credits.


To plan your taxes efficiently, you should be familiar with all the items that reduce your taxable income and your taxes. This knowledge can help you make strategic decisions throughout the year. If not, talk with a financial advisor who does.


3. Keep Records

Whatever decisions you make regarding your tax planning, it’s important to document them in case the IRS ever audits you. The minimum retention period is three years after filing your return. That’s because the IRS usually takes up to three years to decide whether to audit a return. If you substantially underreported income or wrote off a loss on a worthless security, you may have to retain your records for six or seven or more years.

The records you should keep include all 1099 and W-2 forms, brokerage statements, retirement plan forms and statements, and proof of all deductible expenses and a copy of the tax return.


4. Know How to Reduce Your Tax Bill

In addition to deductions and credits, you might be able to take actions that reduce your tax bill. For example, you can reduce the number of allowances on your W-4 form, which means your employer can withhold more money from each paycheck. This will reduce or eliminate the tax you owe on April 15 and might even result in a refund. Similar logic applies to self-employed individuals who increase the size of their estimated payments.

Another way to reduce your tax bill is to contribute money to a traditional IRA or 401(k). Contributions can reduce your taxable income, subject to IRS limits. This also holds true for contributions to 529 accounts, qualified charities, health savings accounts, flexible spending accounts and dependent care flexible spending accounts.


5. Take Advantage of Investor Tax Breaks

Investors can benefit from several tax breaks. The process of tax planning should include:

  • Long-term capital gains rates
  • Qualified dividends
  • Tax selling (Many investors couple the sale of winning and losing investments so that they cancel each other out. This is end-of-year tax selling and it can significantly cut your tax bill.)
  • Sheltered income (If you hold your investments in an IRA or qualified retirement plan, your earnings are tax-free for as long as you keep the money in the plan. You’ll pay ordinary tax rates on plan distributions, which you must initiate once you reach age 70-½, with the exception of Roth IRAs, which don’t have required minimum distributions. Distributions before age 59-½ might trigger a penalty for early withdrawal, so talk with a financial advisor before you retire.)

Financial planning can be complicated. Talking with an experienced financial advisor can be very beneficial. A good financial advisor understands how to plan your taxes efficiently – or has an accountant (like an Enrolled Agent or CPA) in house who is familiar with the common issues and can help your advisor guide you to make the right decisions.


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Amanda Baize

Written by Amanda Baize

Amanda Baize is a Paraplanner with Global View. As an accountant, she provides in-house support for clients and develops tax strategies with our advisors. She also assists with financial planning, portfolio accounting, performance monitoring, and client reviews.

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