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Tax Planning Through Your Life

Tax Planning Through Your Life

Tax planning is perhaps one of the most misunderstood aspects of financial planning.  Most people only think seriously about taxes when they file their annual state and federal tax returns.  While there are things you can do to reduce your taxes when filing, like making sure you’re taking advantage of all possible tax credits and deductions, by that point, it’s really too late to do any serious tax planning.

True tax planning involves making strategic decisions throughout the year that will help you minimize taxes both in the coming April and perhaps many years in the future.  And, contrary to many people’s assumptions, tax planning isn’t something that’s just for the ultrawealthy.  If you earn money and file taxes, you can probably benefit from some level of tax planning.  Today, we’ll walk you through some key tax planning issues you may face throughout your life.

In Your 20’s

You’re just getting started building your life and career, and there’s a good chance your taxes are a bit more complicated than they were when you were a high school or college student.   Consider sitting down with an accountant to make sure you understand where things stand with your finances and that you are doing all you can to reduce the taxes you owe.  Specific tax planning steps you may want to take in your 20s include:

  • Contribute money to a tax-deferred retirement account, like a 401(k) plan or IRA.
  • Keep track of your student loan payments, if you have them. If your income falls below certain

Limits, you may be able to deduct the interest you pay on that debt, even if you don’t itemize.

  • Save receipts and other records if you move for a new job, since expenses related to a move you make for work can be deducted even if you don’t itemize.
  • Check your withholding. If you’re getting a big refund at tax time, you may need to tweak how much is being withheld from your paycheck, so that you’re not giving an interest-free loan to the government.

Finally, make sure you’re keeping all your key financial documents organized.  Find a secure place to store everything, and get essential documents from your parent is they still have them, like your Social Security card, birth certificate, and information about any accounts they may have opened for you when you were a minor.

In Your 30s

Your finances are probably getting more complicated as you increase your savings and complete major financial goals like buying a house.  These tips will help you keep things on track:

  • Keep saving for retirement in tax-deferred accounts but also look into accounts that will generate tax-free income in retirement, like a Roth IRA or Roth 401(k) plan. Yes, you’ll pay more in taxes now, but you’ll be happy to have a tax-free option for income once you stop working.
  • Getting married or having children? Set up a meeting with a tax advisor or financial advisor (or both together) to make sure you’re making tax-smart financial decisions, like itemizing or not itemizing your return. An advisor can also talk to you about setting up a 529 plan to help pay for your children’s future college educations.
  • The government has plenty of credits and deductions for people with children, like the child tax credit, the child and dependent care credit, and the adoption credit. Know what you do – and don’t – qualify for.
  • Take advantage of flexible spending plans and reimbursement accounts. Between you, your spouse, and your children, you may be spending a lot of money on co-pays, prescription drugs, dental appointments, and more.  Save a bit of cash by using money in a tax-free flexible spending account for these costs.

In Your 40’s

You’re hitting your financial stride.  Don’t let any bumps in the road derail your financial plans:

  • Incomes tend to hit their peak when people hit their 40s. That’s good news, but it also means that you may find yourself in a higher tax bracket.  If that happens, look for ways to reduce your taxable income, like maximizing deductible retirement contributions.
  • You may be making more money than in past years, which could mean that you’re ready to upgrade your charitable giving. Make sure you’re keeping track of any gifts you make to eligible charities, whether they are in cash, stock, or in-kind gifts, since you’ll need that documentation if you plan to deduct them on your tax return.
  • If your children are headed off to college, don’t neglect tax credits for education, like the lifetime learning credit and the American opportunity tax credit.
  • Some parents may draw money from taxable investment accounts to pay for college or other expenses. If you’re tapping that cash, be aware of the tax implications of selling appreciated securities.  It may be well worth it to meet with an advisor before you make any big moves.

In Your 50’s

As you hit the mid-century mark, keep doing what you can to reduce the taxes you owe and save as much as you can for retirement.

  • Don’t forget about catch-up contributions to IRAs and 401(k) plans. In 2015, you can contribute an extra $6,000 to a 401(k) plan and an extra $1,000 to an IRA once you hit age 50.
  • Start thinking about health care expenses in retirement, if you haven’t already. Putting some money into a tax-free health savings account is a way to reduce your taxable income today and have a tax-free fund to draw on for health expenses later in life.
  • Selling the family home? Don’t neglect to consider the potential tax implications.
  • If you’ve earned stock options or other perks through your employer, make sure you understand the tax implications of a cash-out.

In Your 60’s

Retirement is on the horizon.  The tax planning decisions you make in the decade will be crucial to your overall retirement success.

  • Understand how your Social Security benefits will be taxed. Up to 85% of your total benefit may be taxed, depending on how much other income you have.
  • Consider converting a traditional IRA to a Roth IRA. Some people may benefit from paying the taxes on the conversion now for the promise of tax-free income later on.  For those who are not eligible for traditional or Roth IRAs, consider contributing to a nondeductible IRA.  As of 2011, all taxpayers, regardless of income level, can convert traditional IRAs to Roth IRAs.
  • Check your options before retiring. The choices you make regarding distributions from your pension plans and IRAs will have a significant impact on your tax situation after retirement. Make sure you review all your options before deciding how to withdraw those funds.

Please call if you would like to discuss your tax situation in more detail.

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Copyright © Integrated Concepts 2015. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.


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