5 Benefits of Planning Your Taxes Six Months In The Future

5 Benefits of Planning Your Taxes Six Months In The Future

June 06, 2023

With a strategic approach to tax planning and looking ahead, you can unlock a world of benefits that will help you stay on top of your financial game.

1. Reduce Tax Season Stress  

We all know that feeling, it's a stress that nobody wants to deal with. By taking the time to get your important tax documents in order, you can avoid that stress and ensure that you have everything you need to file your taxes accurately. Once you're done filing your taxes in the Spring, make a list of all the documents you needed or received in the mail to help you complete your returns. When next year comes, you can pull out that list and be sure you know what you need.

Getting organized early means you'll be able to identify any potential issues or challenges that might come up during tax season, and you'll have time to address them. If you open new accounts, you can add them to the list so you'll know to expect a 1099 or end of year statement from them. 

Let's not forget about the satisfaction of being ahead of the game. It’s empowering to check off an important task ahead of time, knowing that you're one step closer to achieving your financial goals.


2. Make Fewer Errors in Your Tax Returns

In the world of taxes, errors can be a major setback. They can delay the process, create headaches, and even lead to costly penalties. If you gather your information early and review it carefully, you can catch any potential errors before they become a problem. Having time to correct mistakes, you ensure that your tax returns are accurate and complete.

It can be helpful to have pay a CPA to review your prior year's returns to determine if they were filed accurately. This will allow you to determine if you need to amend anything on your current return, change anything on future filings or if you need to keep doing the same things going forward. 


3. Plan for Changes in Advance

Planning early allows you to be in a better position to claim more deductions and credits. By looking ahead you can make adjustments in advance. Tools like the Tax Withholding Estimator on the IRS website can help you to estimate your income levels and the federal income tax your employer may be able to withhold from your paycheck. Some employment plans allow you to defer the recognition of your income from the current year to a future year. This can lower your tax liability and save you money.

Keeping up with tax law changes can be a daunting task, but with a little foresight, you'll have enough time to review any upcoming tax law changes that may impact you, and then proactively adjust your strategies.

Life changes too. Whether you're selling a home, retiring, or relocating to a new state with different tax laws, early planning can make a significant difference. Planning in advance gives you time to understand the tax consequences of these changes and take advantage of any available tax credits or deductions. For example, if you're looking to retire, you can take the time to ensure that your retirement contributions are tax efficient, and your plan is fully funded. You can also determine the optimal time to start withdrawing from your retirement accounts and minimize your tax liability, giving you peace of mind.


4. Develop a Tax Payment Plan

Developing a tax payment plan is a part of taxes that often gets overlooked. Early tax planning allows you to devise a payment strategy for your tax liability that works for you. You can calculate your estimated taxes and build those expenses into your budget. This will help you avoid any surprises.

While you'll likely receive coupons for any estimated payments, you can always make these payments early in the year should you have the cash on hand to do so. By pre-paying your estimated payments, you remove an item from your to-do list and ensure that nothing is forgotten.


5. Optimize Investments and Charitable Donations

Investments are integral to your financial portfolio, and with a forward-looking tax plan, they can be optimized. Instead of waiting until tax season arrives, you can proactively manage your investments, taking into account any capital gains or losses, and plan to pay taxes on those gains when it's more advantageous for you. Plus, you'll have plenty of time to plan for any major asset sales, such as your home or business, to ensure that you're minimizing your tax liability. If your tax rate is high, move into more tax beneficial investments. Expecting a low income year, then you can afford more investments that create income and distributions that are taxable at your income tax rate.

Planning ahead also allows you to optimize your charitable donations and tax benefits. By carefully selecting the charities you support and understanding their tax status, you can maximize the impact of your donations while minimizing your tax burden.  For example, you can reduce your state tax liabilities by donating to charities, such as Qualifying Charitable Organizations (QCOs). You receive dollar-for-dollar benefits up to the maximum allowable limits. Working out your possible tax credits in advance will let you and your chosen charity make the best of your donation. 


Moral of the story? Plan Early to Make the Most of Financial Opportunities

If you want to get the most out of your taxes, you need to plan early. When you think ahead about your taxes, you have more time to evaluate your financial situation, assess your tax obligations, and take advantage of all applicable tax deductions and credits. As I work with clients, we're doing tax planning as early as June, but always make sure it's done in the Fall. 

Looking at your financial picture with the help of a fee-only financial planner you can develop a tax strategy that aligns with your financial goals and achieve long-term financial success. Make the most of your head start!