For many Americans, the annual April tax filing deadline marks the end of tax discussions for the year. But that could be a mistake, especially in 2018. That’s because recent changes to the tax law under the Tax Cuts and Jobs Act of 2017 underscore the importance of ongoing planning to avoid surprises and take advantage of provisions that can help you, your family, or your business manage your tax exposure.
Yet, tax planning is about far more than understanding which deductions remain and which are capped or eliminated. Since all financial decisions have tax implications, it’s critical to understand the impact taxes have on all areas of planning because at the end of the day it’s not what you earn, but what you keep that matters. For example, we know that taxes can significantly diminish investment returns.
So, how you allocate your assets across taxable, tax-deferred or tax-free accounts is important for determining how much you may keep and how much may go to Uncle Sam.
While earnings from dividends and capital gains in a taxable account are generally subject to taxes in the same year they’re realized, taxes on earnings from similar investments held in qualified retirement plan accounts, such as a 401(k) or traditional IRA, are deferred until you take distributions, generally when you’re in retirement. By using tax-deferred investment vehicles to save for your long-term financial goals like retirement, you’re able to postpone taxes on certain income, such as contributions made on a pre-tax basis to 401(k) and traditional IRAs, as well as any account earnings. How you allocate your assets across taxable and tax-advantaged account types can also help you tap into your money in the most tax-efficient manner when you begin taking distributions from those accounts—helping to avoid unnecessary taxation which can diminish your assets and your income potential over time.
Tax planning throughout the year also helps identify opportunities to manage your tax exposure through strategies that may include tax-loss harvesting, gifting to loved ones or the charitable organizations you support, or accelerating deductions (such as out-of-pocket medical expenses or charitable contributions) in a given tax year.
For tax-year 2018, and until certain provisions impacting individual taxpayers are scheduled to expire at the end of 2025, financial decisions made throughout the year will help determine if you have enough allowable deductions to itemize, or if the increased standard deduction ($12,000 for individuals; $24,000 for those married and filing jointly) is the better option for you.
While the tax strategies that are right for you will depend on your personal situation and circumstances, there’s no question that planning throughout the year can greatly reduce the potential for surprises when it comes time to file your next return.
To learn more about tax-advantaged investment strategies, contact the office today at 830-609-6986.
* The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.