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How to Apply Lessons Learned This Tax Season


4 Tips to Help Improve Next Year’s Tax Filing

Life experiences provide us with wisdom and opportunities to grow and change, and that applies to tax filing as well. As much as we all wish to be done with the dreaded task after our returns are submitted, it’s wise to take some time to evaluate this year’s taxes and identify opportunities to improve next year’s filing. Following are four potential lessons to take away from this year’s tax season.

Lesson #1 – Organization Is Key

Were you scrambling to pull together your receipts and documentation? Did you have a hard time remembering all your charitable donations and business expenses? If so, it may be time to reevaluate your organizational methods.

Now is a great time to set up a filing system as well as a spreadsheet to track your potential deductions throughout the year, especially if you plan on filing an itemized return. Consider downloading a tax tracking spreadsheet online, and be sure to update it regularly throughout the year. This preparation can help ensure nothing slips through the cracks and that you’re taking full advantage of all deductions available to you once tax season rolls around again.

Lesson #2 – Retirement Plan Contributions Can Make a Difference

Tax filing season is a great opportunity to reevaluate your retirement plan contributions. Pre-tax contributions to 401ks and traditional IRAs directly reduce your taxable income for the year, which can also reduce the amount you owe come tax time.

In 2023, employees can contribute up to $22,500 to an employer-sponsored plan, plus an extra $7,500 catch-up contribution for employees age 50 or older. At a minimum, make sure you’re contributing enough to your plan to take full advantage of any employer matching contributions available.

Lesson #3 – Your Investment Portfolio Offers Several Tax-Saving Opportunities

One of the best ways to lower your tax bill is by taking advantage of tax-saving opportunities within your investment portfolio. There are two key portfolio management strategies that can help reduce your tax liabilities:

  • Asset location – Asset location allocates tax-efficient investments to taxable accounts and tax-inefficient investments to tax-advantaged accounts. This practice helps unlock the tax-savings benefits of various account and investment types.

Typically, the higher an investment’s return, the more taxes you’ll need to pay. That’s why it’s wise to place high-return investments in tax-advantaged accounts. Investments with lower return potential, such as U.S. government bonds and cash, can be placed in taxable accounts without incurring significant tax liability.

  • Tax-loss harvesting – Within an investment portfolio, you’re only taxed on net capital gains, which equals gains minus losses. This means any realized losses reduce your tax liability. Tax-loss harvesting is the process of looking for opportunities to realize losses in order to offset gains.

Tax-loss harvesting works by taking advantage of selling an investment that has declined in value in the short term (a common occurrence in a heavily weighted equity portfolio) and replacing the investment with a highly correlated alternative. If done correctly, the result is that the risk profile and expected return of your portfolio remain unchanged, but the temporary tax losses are extracted in the transaction.

By realizing the investment loss, a tax deduction is generated that can lower your taxes. You can then reinvest your tax savings to further grow the value of your portfolio.

Lesson #4 – It May Be Time to Reevaluate Your Withholding Elections

If you ended up owing the IRS more than anticipated, or received a large refund, it may be time to update your withholding elections on Form W-4.  A common mistake many taxpayers make is failing to complete all sections of the W-4; another is providing outdated information.

Form W-4 provides an opportunity to pay toward your estimate tax liability prior to filing your taxes. The only information your employer has to determine how much to withhold from your paycheck is what you provide on your W-4. If you have taxable investments, self-employment income or any other income that’s not reported on your W-4, you may owe additional taxes at the end of the year.

Your wealth manager and tax advisor can provide guidance to help optimize your withholdings based on any outside income.

Could you use some help applying the lessons you learned this tax season? Creative Planning is here for you. We deliver a team of credentialed, educated, experienced and action-oriented advisors, including CERTIFIED FINANCIAL PLANNER™ practitioners, certified public accountants, insurance specialists, attorneys and other professionals dedicated to helping you achieve your financial goals. For help with your tax planning strategies, schedule a call with a member of our team.

This commentary is provided for general information purposes only, should not be construed as investment, tax or legal advice, and does not constitute an attorney/client relationship. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed.


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