Financial Planning
July 26, 2022

When Should You Start Tax Planning?

Procrastination can be costly
Stewart Willis
Co-Founder & Co-Owner Asset Preservation Tax & Retirement

Nearly a third of Americans delay filing their taxes until the last minute! If the first time you consider your taxes is when you begin to fill out that 1040 form, you may neglect some significant tax breaks.

There are many positives to prioritizing tax planning year-round. Not only can you conserve money by fulfilling certain deadlines, but you can strategically use the provisional economic conditions to create a more beneficial tax picture.

Reduce your Tax Burden

There are several ways to reduce your tax burden and save money. One example is making charitable contributions. If you itemize your taxes, you can claim charitable donations you made throughout the year, but only if you make them by the last day of December. If you wait, you can’t claim them on your taxes this year.

Another way to lower your tax bill is by making extra mortgage payments. The interest you pay is tax-deductible, so making an extra payment means a lower tax bill. But again, you have to make those extra payments before New Year’s Day, or it won’t count for this year’s taxes. Planning your taxes year-round allows you to anticipate those deadlines and take advantage of tax breaks before it’s too late.

Tax planning throughout the year also lets you keep an eye on economic conditions and use them to your advantage. A great example is happening as I write this. We’re in a bear market, which means the value of our investments are down almost across the board. That gives us two great opportunities if we act quickly enough.

Tax Loss Harvesting

The first is called tax loss harvesting. Selling an investment that’s worth less than you paid for it is a capital loss. You can use that loss to offset capital gains from other investments. Not only that, if your capital losses outstrip your gains for the year, you can use those losses to deduct up to $3,000 from your ordinary income tax. Plus, losses on top of that $3,000 can be rolled to future years.

By selling your investments at a loss, you set yourself up for significant tax advantages, sometimes for years to come. If you buy different assets after you sell, you can still enjoy the gains when we exit the bear market.

There are some rules to follow when buying replacement assets. The IRS’s wash-sale rule establishes a waiting period between selling and buying the same or “substantially identical” assets in order to harvest your tax losses. Your financial advisor can help you identify replacement assets that won’t be considered a wash sale.

Roth Conversions

A second move to strongly consider in bear markets is a Roth conversion. Usually that’s something we do at the end of the year, but doing it mid-year during bear markets could be a huge opportunity! When you convert a traditional IRA to a Roth IRA, you pay taxes on the value of the assets in the account. Investment accounts like IRAs and 401(k)s lose value in bear markets, so converting to a Roth in a bear market is cheaper than converting in bull markets.

You don’t have to pay taxes on gains made by assets in a Roth IRA, and you don’t have to pay taxes for withdrawing funds from the Roth as long as you’re more than 59½ years old. That means converting to a Roth when your IRA’s assets are depressed can be a great way to save money long-term. When the market rebounds, all the gains in the Roth will be tax free; you’ll be able to catch that bounce if you plan at the right time.

These are just a few examples of the money moves you can make if you plan your taxes year-round rather than only thinking about them when it’s time to file. When tax planning, work with a financial planner who can help you find ways to reduce your tax burden and avoid payingmore than you should.At Asset Preservation Wealth & Tax, we’re always looking for ways our clients can put themselves in a better tax position.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

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