3 Steps to Actively Manage Your Taxes in 2024

This article is a summary of our webinar: 3 Steps to Actively Manage Your Taxes in 2023. Click here to view the webinar recording.

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Proactively managing your tax situation can be a daunting task, but it is essential for financial stability and building long-term wealth. There are many ways to actively manage your taxes, and in this blog post we’ll discuss three specific steps you can take to ensure you are maximizing your tax savings and reducing tax-time stress. 

Before jumping in, it’s important to understand a common misinterpretation that is made in the area of taxes, and that is tax preparation vs tax planning. 

• Tax Preparation: the act of collecting the relevant information needed and then filing your tax return in accordance with Internal Revenue Service (IRS) obligations. Preparing your tax return is a backward-looking exercise, meaning you are collecting relevant documents based on things that have already happened (and taxes that have already been paid) to determine if you’ll be receiving a refund or owe additional tax dollars before the deadline. Tax preparation is simply “checking the box” and doesn’t involve any strategic thinking or proactivity.

• Tax Planning: proactively and intentionally looking at your tax situation throughout the year and making strategic and calculated adjustments along the way in order to achieve maximum tax efficiency. Tax planning is important because it avoids the feeling of surprise around taxes and that anxiety that comes with crossing your fingers and hoping for the best every year. Instead, planning can help you know what to expect, what adjustments to make ahead of time to feel confident that you did all you could to better yourself, tax-wise, for the future. 

With a better understanding of what tax planning is, let’s take a deeper dive into the three specific steps we have identified to best plan for taxes proactively throughout the year. Each step will have time frames around when it should be looked at during the year and what big questions or conversations you should be asking or having with your financial and tax advisors. 

• Step #1: Evaluate Your Previous Year’s Tax Return
• Step #2: Build Your Current Tax Year Game Plan
• Step #3: Set the Plan in Motion

Step #1: Evaluate Your Previous Year’s Tax Return

Timing: April – May (after receiving the tax return)

After receiving your return it’s a great time to slow down and look back on last year and see how it played out. When evaluating your return, the goal is to identify key parts to help recognize areas where changes can be made to help improve your tax situation.

What to look for:

• What was my marginal tax rate?
  • What was my most recent marginal tax bracket for the previous year?
• Did I owe or receive a refund?
  • This is a major area of surprise that we see a lot. If you did receive a return or you had a tax liability, why was that the case
• How much investment income did I generate and where?
  • What was the mix of investment income? Generally, investment income comes in three categories: Dividends, interest, and capital gains and these are three main pillars of investment income taxation. This is a great place to stop and look to see if your portfolio is as tax efficient as it can be?
• What credits or deductions did I qualify for? Are there others I should have qualified for?
  • This is another large area of frustration. Understanding and getting familiar with the various credits that are out there is a great place to start and reviewing what you did qualify for and learning what you should have qualified for is a great start to putting yourself in the best tax situation for next year.
• Do I expect a change in my income for the current year opposed to the prior year?
  • The main reason for evaluating your tax return is to learn what might look different this current year from last year. Will income be substantially different due to job changes or retirement? 

Looking back at these key areas and getting to know why your tax situation ended up the way it did will substantially help your tax experience for the current tax year. 

Step #2: Build Current Tax Year’s Game Plan 

Timing: June-July

Once you have evaluated your previous year's tax return, the next step is to build a game plan for the current tax year by projecting out specifically what will change this year from last year. This can mean walking through the full tax return and crossing out last year’s figures and inputting this year’s projections, but when we go through this process we do a side-by-side comparison of the two years and update the figures to project the current year. 

What to do:

• Print out or download your tax return.
• Mark up and evaluate - what numbers are expected to change for this year?
• Apply these updated numbers to the IRS tax formulas.
• Identify your action steps.

Step #3: Set the Plan In Motion

Timing: October – December

Once you have completed the mid-year side-by-side comparison of tax projections and potential changes to have a better grasp of what your tax reality will look like for the year, now is the time to put those changes into action. It’s extremely important to implement and solidify your changes prior to year-end to ensure everything goes as planned. 

What to do:

• Run a final tax projection
• Execute year-end action items
  • Charitable donations (either stock or cash)
  • Roth conversions
  • Tax payments from retirement accounts
  • Tax-loss harvesting
• Complimentary Tax Report

If you are interested in a complimentary tax report analysis please do not hesitate to reach out directly to your advisor or by emailing us at info@burneywealth.com