For some, it's that extra special time of year when you've just finished rushing to meet the extended due date for filing your business tax return (9/15), you're scrambling to meet the extended due date for filing your individual tax return (10/15), and all the while you're trying your best to meet your year-end planning goals. It is a lot to juggle. Tax planning, for many individuals, is something addressed once a year, often in a last-minute rush before the filing deadline. However, for high-income individuals, especially those with complex financial situations, year-round tax planning can help reduce tax liability, manage assets more effectively, and align current financial strategies with long-term goals.
Year-round tax planning allows you to not only react to tax deadlines but to actively manage your financial affairs in a way that maximizes tax efficiency. Below are some key benefits of adopting a proactive approach to your taxes throughout the year.
Prevent Surprises
High-income individuals often experience fluctuations in income due to bonuses, stock sales, rental property income, or capital gains from investments. Without careful planning, these variations can lead to unexpected tax bills, penalties, or underpayment of taxes.
We are subject to a progressive income tax system, and high earners may find themselves in the top tax brackets. Year-round tax planning assures that you're withholding the correct amount of state and federal taxes based on your evolving income throughout the year. Regularly reviewing your financial situation with a tax professional can help you avoid underpayment penalties and spread tax obligations more evenly.
Maximize Available Deductions and Credits
A primary advantage of year-round tax planning is the ability to maximize available deductions and credits. Taxpayers who wait until the end of the year may miss out on valuable opportunities to reduce their taxable income. Through proactive planning, you can take full advantage of deductions related to charitable giving, healthcare costs, mortgage interest, and retirement contributions.
For example, Ohio taxpayers can benefit from the Ohio CollegeAdvantage 529 savings plan, which offers a deduction of up to $4,000 per beneficiary per year (with unlimited carryforward). Consistently contributing to this plan year-round, instead of making a lump-sum payment at the end of the year, helps you maximize this deduction while also growing tax-free savings for educational expenses. Similarly, reviewing your charitable contributions early on allows you to strategize how much you can give to maximize your tax benefits while supporting causes important to you.
Plan for Retirement
Tax planning and retirement planning are deeply intertwined. High-income earners can benefit from year-round tax planning to maximize contributions to tax-advantaged retirement accounts such as IRAs, 401(k)s, and Roth IRAs. While these accounts provide valuable tax-deferred or tax-free growth, the key to maximizing their benefits lies in making regular contributions throughout the year, rather than waiting until year-end.
Contributing to traditional retirement accounts can reduce your taxable income today, which is especially valuable for those in higher tax brackets. Alternatively, if you anticipate being in a lower tax bracket during retirement, converting some of your traditional IRA assets into a Roth IRA may be an advantageous strategy. A Roth IRA allows for tax-free growth and withdrawals, but this conversion needs to be planned to avoid triggering a large tax bill all at once.
Estate Planning Strategies
For those looking to preserve wealth for future generations, year-round tax planning is critical for effective estate and gifting strategies. Although Ohio does not have an estate tax, federal estate taxes may apply to larger estates. Proactive tax planning throughout the year allows you to take advantage of the annual gift tax exclusion ($18,000.00 in 2024) and reduce the size of your taxable estate while providing financial support to loved ones.
In addition, establishing trusts or family-limited partnerships can help you protect your assets and minimize future tax burdens. These strategies require careful planning and ongoing adjustments to remain in compliance with tax laws and the preservation of your wealth.
Align Goals with Taxes
Lastly, year-round tax planning helps align your overall financial strategy with your tax goals. Whether you're focused on building wealth, saving for retirement, or funding a business venture, a proactive tax plan helps you identify opportunities for tax savings that support your broader financial aspirations. For high-income earners, these strategies are essential in maintaining financial growth while minimizing the tax burden.
Tax planning is not just a once-a-year exercise; it's a year-round process that offers significant benefits for high-income earners. By staying ahead of tax obligations and working with financial professionals who understand the ever-changing tax laws, you can maximize deductions, avoid penalties, and ensure your financial goals are met in the most tax-efficient way possible. Proactive planning is key to keeping more of what you earn and building a secure financial future.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.