A Winning Strategy: Plan Your Next Year’s Taxes Now!

You may think of taxes as simply something to be prepared once a year, and thought of as little as possible otherwise. The thought of planning your tax strategy ahead of time may seem overwhelming, if not totally crazy. (Spoiler alert: it’s not.) Let’s see why. 

Plan taxes now? Are you crazy? 

Tax planning is entirely different from tax compliance. 

Tax compliance is the actions you take to stay on the government’s good side by preparing a tax return and paying your tax bill every year. 

Tax planning, on the other hand, is structuring your personal or business finance decisions to legally minimize the amount of tax due. With a little basic knowledge and organization, you can take advantage of more tax deductions and credits to keep more of your money every year.

Keep track of your finances

The first step to tax planning is to know where your money is, and where it is going. If your employer is withholding a larger amount of your paycheck for tax purposes, you may want to ask if you can change your W-4 information to withhold less from your paycheck. Some people like to have extra withheld, so they can get it back as a refund at tax time.

However, if your overall goal is to pay less in taxes, you don’t want the government holding more of your money for you. Keep the money yourself, and use it in ways that will earn you bigger tax deductions in your next annual statement.

The big ones 

Another big way you can keep track of your finances is by tracking any life events leading to major expenses during the year.

• If you bought a house for the first time this year, keep track of the amount of mortgage interest paid, as this may be tax deductible. 
• Federally-based student loan interest is also tax deductible
• If you work from home, you may be able to claim a tax deduction on a home office. 
• If you bought a car, you may be able to claim some of the sales tax paid as a tax deduction as well. 

Keep your records

Keeping records and receipts is critical. 

• While it is unlikely that the IRS will choose your tax return for an audit, you need to have proof of your deductible expenses.
• Storing your receipts can be done with a folder or series of folders for each expense category, and a secure place to keep them such as a file cabinet or desk drawer. 
• Alternatively, you could scan them and keep them as PDF’s in a folder on your computer or phone. 
• Take a few minutes at the end of each month to review your expenses for the month. 
• This gives you a time to list your deductible interest paid for the month. 
• It also makes it easier to list exact dates for events like a car purchase. 
• If you wait until year-end or tax time to review your tax deductions, you may find yourself guessing over dates or digging through papers to find what you need.

Plan for future financial position

Saving and investing for your future is another great way to save on taxes. Investing in a 401(k) or traditional IRA account is a way to save for your future and reduce your taxable income at the same time.

For the 2024 tax year, the maximum 401(k) contribution will be $23,000, and the maximum IRA contribution will be $7,000. For most Americans, the entire contribution amount is tax deductible, so every bit of your money you can save in this way reduces your taxable income and could even place you in a lower tax bracket.

What’s deductible and what’s not

There are things that are not deductible from your taxable income. Some things never were deductible – there’s no tax credit for pets –  and others used to be but were removed from the list of allowable deductions in the 2017 Tax Cuts and Jobs Act. 

Is Uncle Sam after me?

If you follow tax planning tips to legally minimize your taxes, then no, Uncle Sam won’t be knocking on your door. If you do not pay your taxes at all, claim inappropriate deductions, or falsify your tax returns, then yes, the IRS will send you a strongly worded letter and you will incur heavy fines and penalties. 

Having a little basic knowledge of tax planning will allow you to pay the minimum legal amount of taxes and keep more money in your pocket. 

Understanding allowable deductions, smart investment choices, and tax withholdings can lower your taxable income every year. 

Tax planning is one very valuable tool in your knowledge base as you learn to win with money.