Tax Planning Tips and Understanding Your Return

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As many of you know, tax season can be overwhelming, but understanding your return is essential for making informed financial decisions. Whether you’re filing your own return or having your return prepared by a professional, knowing what to look for can help you optimize your deductions, minimize liabilities, and avoid costly mistakes. Here are some important tax tips to help guide you through tax season.

Knowing the Key Sections of your Return

Your tax return, filed using Form 1040, consists of several important sections:

• Filing Status: This determines your tax brackets and eligibility for certain credits. Choosing the correct filing status can greatly reduce your tax liability. For example, a divorced or separated individual that meets the tests to file as Head of Household but because of a separation agreement is not eligible to claim the child on the tax return can possibly file as Head of Household rather than Single. This would increase your standard deduction and use tax brackets with higher thresholds.
• Adjusted Gross Income (AGI): This is your gross income, which includes wages, self-employment earnings, investment income, rental income, pensions, IRA distributions, and other taxable sources, but subtracts “above the line” deductions such as traditional IRA deductible contributions, HSA contributions, self-employed healthcare premiums, self-employed retirement contributions, Qualified Charitable Distributions (QCDs), as well as other deductions. AGI or a variation known as Modified Adjusted Gross Income (MAGI) is important because it is used in multiple calculations to determine whether the taxpayers are eligible for deductions or credits both at the federal and state levels.
• “Below the Line” Deductions and Adjustments: These cover deductible expenses such as charitable donations, mortgage interest, medical expenses, property taxes, and more, which are itemized deductions. If your itemized deductions are not great enough, you can claim the standard deduction, which was greatly increased in 2018. Another adjustment is Qualified Business Income Deduction.
• Tax Credits: Credits reduce the tax you owe dollar for dollar. Some examples include Child Tax Credit, Education Credits, Electric Vehicle Credits, and many more.
• Withholding and Estimated Tax Payments: These help you avoid underpayment penalties. Withholdings from wages or retirement accounts are averaged out over the entire year, whether withholding was done evenly or at the end of the year. Estimated payments, however, must be paid by the due date to be counted for that quarter, which can cause taxpayers to owe an underpayment penalty and interest for a quarter or more if the payment is late.

Maximizing Your Deductions and Credits

You can lower your tax liability by taking full advantage of deductions and credits. Here are some key credits and deductions to be aware of:

• Pre-Tax Retirement Contributions: Contributions to a Traditional 401(k) or Traditional IRA can lower your taxable income. For 2024 and 2025, the IRA contribution limit is $8,000 per year if you’re age 50 or older (the limit is $7,000 for those under age 50). Keep in mind, though, that there are the long-term benefits of Roth 401(k) and Roth IRA contributions, as opposed to the immediate tax deduction for Traditional retirement plan contributions. We help our clients determine the best account to contribute to.
• Health Savings Account (HSA) Contributions: If you have a high-deductible health plan that is HSA-qualified, contributions to your HSA are tax-deductible and grow tax-free within the account. The best way to contribute to HSAs is by making the contributions directly from your pay. However, if you do not contribute directly from your pay, you can still contribute to your HSA with after-tax funds to reduce income.
• Education Credits: The American Opportunity Credit and the Lifetime Learning Credit can offset education expenses. These credits are limited by income. Consider reaching out to your advisor to discuss your ability to use these credits if you have education expenses for you or a dependent.
• Energy-Efficient Home Improvements: Tax credits are available for solar panels, energy-efficient windows, and HVAC systems. Be sure to let your preparer know if you made any home improvements to allow the tax preparer the opportunity to see if you qualify for this credit.

Be sure to talk with your advisor and tax professional about what credits may apply to you.

Understanding Taxable vs. Non-Taxable Income

Not all income is taxed the same way. Below are some examples of taxable and non-taxable income.

• Taxable: Wages, self-employment income, rental income, interest, and certain investment income.
• Non-taxable Income: Gifts, life insurance payouts, qualified Roth IRA distributions, and some Social Security benefits.

Understanding what income you have and what is taxable or non-taxable can help you better plan and avoid surprises. Working with tax professionals can help you have a better understanding of your specific situation if you have any questions.

Avoiding Common Tax Filing Mistakes

Mistakes on your tax return can lead to audits, penalties, or accrued interest on underpayments. Below are some common errors to avoid.

• Incorrect Social Security Numbers: Always double check your own SSN, your spouse’s SSN, and dependents’ SSNs.
• Missing Income: The IRS receives copies of your W-2s, 1099s, and other tax documents. Failing to report all your income can potentially trigger an audit by the IRS.
• Overlooking Tax Credits: Many people miss out on valuable credits solely because they are not aware of them.

Having your return professionally prepared by a tax professional and/or reviewed by your advisor can greatly reduce the risk of any mistakes and potential audits. We encourage all our clients to at least let us review their return before they file if we do not prepare their returns.

Planning Ahead for Next Year’s Taxes

A proactive tax strategy can help you reduce your tax burden and avoid surprises. Many people do not take action with regard to their tax situation until it is time to file their return. It is very important to do tax planning throughout the calendar year to ensure you are putting yourself in the best position possible tax-wise. Below are some tax planning strategies you should consider and discuss with your advisor:

• Adjust your withholding: If you received a large refund or owed a significant amount, consider adjusting your tax withholdings with your employer.
• Track Business and Investment Expenses and Other Deductible Expenses: Keep records of deductibles and expenses throughout the year to maximize deductions.
• Review Retirement Contributions: Contributing to tax-advantaged accounts like Traditional 401(k)s, IRAs, and HSAs can lower your taxable income.
• Consider Tax-Loss Harvesting: If you have investment losses, you can use them to offset capital gains and lower your tax bill. This should only be done and considered with the help of your advisor and/or tax professional.

Throughout the year, we assist our clients with tax planning by creating tax projections to look for strategies that can benefit them.

Understanding your tax return and planning ahead can help you keep more of your hard-earned money while staying compliant with tax laws. We strongly encourage you to work with your financial planner or tax professional to ensure you’re making the most tax-efficient choices for your specific situation.

If you have questions or need personalized tax planning, please feel free to reach out to us at the Financial Consulate. A little bit of planning now can make a big difference when tax season rolls around!

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