6 Reasons Why It Pays to Start Planning in Q1
Many Americans scramble in December each year to finalize charitable donations, harvest portfolio losses and make last-minute retirement plan contributions in an effort to lower their annual tax liabilities. If this sounds like you, you may be surprised to learn that you could be missing out on tax saving opportunities and creating unnecessary stress.
By starting the tax planning process early in the year, you can set yourself up to take advantage of opportunities that may not be available later in the year. Read on to learn several benefits of early tax planning.
#1 – Help ensure alignment between your tax planning strategies and overall financial plan
Reviewing your financial and tax planning strategies with your wealth manager early in the year helps ensure all aspects of your financial life are working together to maximize your wealth and minimize your tax exposure.
#2 – Maximize your tax credits and deductions
Beginning the tax planning process early in the year can provide you with better insight into your year-round income and expenses, helping you:
- Optimize budgeting decisions around cash flow management and/or savings strategies
- Plan strategic charitable donations
- Decide whether to defer or accelerate income or expenses for tax efficiency
#3 – Optimize the tax-efficiency of your portfolio throughout the year
Planning early allows you to continuously seek tax-saving opportunities within your investment portfolio. For example, you may identify a tax-loss harvesting opportunity early in the year that you can use to offset capital gains elsewhere within your portfolio, reducing your tax burden.
#4 – Understand how taxes impact other financial decisions
Gaining an understanding of your tax liabilities early in the year can help you make smart decisions across other aspects of your finances. For example, you may be able to:
- Identify a need to change your W-4 withholdings based on a recent life event
- Determine whether “bunching” multiple years’ worth of charitable donations will significantly lower your tax exposure in a high income year
- Better choose between tax-deductible or Roth contributions to your 401k plan
#5 – Establish a realistic budget
It can be difficult to budget when you have no idea what your year-end tax liabilities may be. Starting the tax planning process early in the year allows you to incorporate tax-efficient strategies into your budget, such as:
- Setting aside funds for a large tax bill
- Making and tracking charitable donations to lower your tax liabilities
- Contributing to a health savings account (HSA) or 529 plan
#6 – Streamline next year’s tax filing
One of the best ways to reduce stress and simplify next year’s tax filing process is by staying on top of your tax planning strategies throughout the year. This typically means keeping organized and accurate financial records, planning for income and making adjustments to your tax planning strategies as your life evolves throughout the year.
