Super Charge Your Tax Planning with These Tips

By Steven A. Henderson, CPA, PFS, CFP®, CKA®; Regional Director and Partner at Merit Financial Advisors

Taxes are a fact of life, and a generous source of revenue for the United States government, but the stress of completing them can take a toll on our mental health. According to a recent survey from U.S. News, one in five Americans with tax debt consider themselves “extremely stressed” about the situation. But with appropriate planning, tax time doesn’t have to be stressful. Here are the most important tips I’m sharing with clients this year.

Understand the biggest tax planning ideas for 2024

Clients always want to know what they can do to pay less tax. The truth of the matter is that the tax rules change constantly, so the best way to take advantage of that is to treat paying taxes like your overall finances: create a plan and continue refining that plan over time.

For most of Merit’s clients, particularly those with substantial assets, their tax professionals will have a planning session before the end of the year to project taxes owed and to avoid surprises when they complete their annual tax return. The current standard deduction is high, and getting over that threshold with itemized deductions can be very difficult, without advance planning. Philanthropic donations are one of the easiest ways to reach a deduction level that exceeds the standard deduction and pay less tax, with an added bonus of contributing to causes that matter to you. One idea is to bunch your donations, thereby giving you two years’ worth of donations in one year which can often get you over the standard deduction, which allows you to reap the some tax benefit.  Another idea for larger charitable donations is to use a Donor Advised Fund (DAF).  DAFs are great for individuals who want to donate highly appreciated assets, such as stocks, land, or even an interest in a closely held business. They allow taxpayers to avoid ever paying any tax on these appreciated assets and to actually choose the eventual benefiting charity in future years, after the gift has been made. 

Fortunately, there are other tax savings tools that with proper planning can provide taxpayers with significant tax savings. For example, if you are subject to the Required Minimum Distribution (RMD) rules on your IRAs, making charitable contributions directly from your IRA to a charity, as a Qualified Charitable Distribution (QCD), allows taxpayers to avoid tax on a distribution that would otherwise be taxable. QCDs were made permanent in the tax code several years ago and are now used by many taxpayers as an important part of their tax planning. They are available to individuals over the age of 70.5, up to $100,000 each year, but they can only be made from IRA accounts (the rule doesn’t apply to 401(k)s).

Special considerations for retirees and entrepreneurs

For retirees the complexity surrounding how Social Security gets taxed, and the impact that large amounts of income have on your Medicare premiums is often not understood.

The Centers for Medicare & Medicaid Services (CMS) announced changes to Medicare premiums in October that can impact taxpayers for a full year before Medicare premiums can revert back to normal. Planning and taking advantage of some income reduction ideas is the best way to manage the impact your income has on your Medicare premiums. Your financial advisor can help you prepare and streamline any potential losses.

While it’s now too late for employees of small businesses to reap the full benefits for 2023 from company sponsored plans, e.g. 401(k)s and Simple IRAs, there is still time to benefit from other types of plans. For example, SEP-IRAs and Solo 401(k)s can be opened after year-end and funded through the extended 2023 tax deadline. Also, now is a good time for businesses to consider setting up a 401(k) for next year to have a vehicle in place for maximum tax savings from retirement contributions. And while it’s easy to blow off quarterly tax estimates, you risk owing a substantial amount of taxes when your return is due next year, and the possibility of underpayment penalties. Make sure your bookkeeping is up to date and that you share income estimates with your advisor and CPA regularly to ensure you stay on track. 

Last but not least, you should be aware that many of the tax benefits passed during the COVID years, such as bonus depreciation and ERC tax credits, are either being phased out or have ended. There has been some legislative effort to restore some of these, but it remains to be seen if any of that will happen.

Pay attention to the TCJA Sunset

It is said the only constant is change, and the Tax Cuts and Jobs Act (TCJA) is a great example of this. The TCJA was a major tax act that was passed in 2017 that, among other things, lowered personal and business income tax rates, and doubled the estate tax exemption. Most TCJA provisions are slated to sunset in 2025, including the higher estate tax limit. Leverage your tax professional to better understand your tax liability and plan ahead. Will 2025 year bring higher tax rates, less tax deductions, and lower estate tax exemptions? We won’t know until we know, but one thing is for sure: the government has a plan for your money if you don’t.

Form your dream team

Paying taxes may seem like an individual sport, but you will want to surround yourself with the best possible team. Like anything else, the addition of professional experts into your life as you build wealth can only benefit your overall cause.

My biggest tip to clients, new and old, is this: if you hire a CPA, bring them into alignment with your financial advisor. Together, the two professionals can share intelligence on your personal goals and create the best plan for you that help to ensure the biggest tax efficiencies.

The bottom line: have a plan for taxes

Having a plan for your taxes is a hallmark of great financial planning. It doesn’t have to be complicated, but having a general sense of what your total expected income will be and understanding how the tax rules work and which apply to you will give you a big advantage.

This is also the time to determine if your beneficiary designations are up to date. Do you have your estate planning in order? If you died today, would things go the way you want them to go?

It’s always hard to plan if you don’t know tax rules or the facts surrounding your personal income. Work with trusted professionals to budget your tax obligations and look forward to smoother sailing and a more enjoyable start to Spring this year.

Working with your advisor can help with tax planning. Don’t have a financial advisor? Contact Merit Financial Advisors today for a complimentary consultation.

Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC registered investment adviser. Merit Financial Group, LLC and Merit Financial Advisors are separate entities from LPL Financial.

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.