Tax planning might not top everyone’s list of leisure activities, but in the middle of tax season, there’s a hidden opportunity.
What if, instead of seeing it as a mere logistic hurdle, we embraced it as a moment to refine our financial strategy?
In this episode, we talk about five strategies you can use during tax season to create opportunities to help you reach your financial goals.
Understanding Effective and Marginal Tax Rates
To build an efficient tax strategy, start by evaluating your effective and marginal tax rates. Your effective tax rate, the total tax divided by your taxable income, gives you a snapshot of what percentage of your income goes to taxes. Meanwhile, the marginal tax rate – your tax bracket – indicates how much tax you’ll pay on an additional dollar earned.
These rates aren’t just static numbers; they should be assessed within the context of your financial future. Analyze whether your tax rate will rise or fall in the coming years. A current high rate might prompt strategies to lower taxable income now while anticipating lower rates in the future might lead you to bring in more income today.
Harnessing Tax-Advantaged Savings
Retirement accounts and health savings plans offer the dual benefits of saving tax and building wealth. Tax season is a great checkpoint to assess whether you’re maximizing contributions to your 401(k), Roth IRA, and Health Savings Accounts (HSAs). When you look back on the past year, did you meet your savings targets? If you didn’t, what were the challenges that meant you didn’t put away as much as you had hoped?
Tax season is also a great moment to adjust your strategy based on any upcoming changes in tax rates. If you foresee tax increases, maximizing your tax-advantaged accounts provides immediate deductions and long-term growth potential. Early in the year, set clear savings goals to streamline your contributions over time instead of rushing at year-end.
Navigating Life Changes and Their Impact on Your Tax Situation
Major life events like getting married, moving house, or changing jobs can also drastically affect your tax situation. They aren’t just personal milestones but important life events and moments that should prompt you to update your financial plans. An increase in income might present opportunities for new types of savings or necessitate adjustments in withholding amounts.
If you end up moving to a new state, it introduces a whole new tax landscape. With different tax rates and incentives in each state, you need to be well informed about how new rules impact you, as they could very well lead to substantial tax savings. Business ventures or new income sources without tax withholding also necessitate proactive planning to avoid year-end surprises.
Crafting a Smart Donation Strategy
The decision to itemize or claim the standard deduction involves strategic planning, especially given the elevated standard deduction under current laws. For lots of people, charitable contributions are the tipping point for itemized deductions. One effective strategy is “bunching” donations – doubling up contributions in one year and skipping the next. This allows you to surpass the standard deduction threshold and reap tax benefits while maintaining your charitable goals.
Consider other donation options, like contributing appreciated securities or making qualified charitable distributions from IRAs if you’re eligible. These methods can optimize your tax position while supporting your philanthropic aspirations.
Staying Informed on Tax Law Changes
Tax laws are continually evolving, with considerable changes anticipated in 2026. Remaining informed allows you to adapt your strategies proactively. Whether it’s keeping ahead of extensions due to natural disasters or larger impending changes, staying educated and nimble in your tax approach can safeguard your financial health.
Rather than viewing tax season as a chore, think about it as a strategic opportunity. By understanding tax implications, maximizing contributions, preparing for life changes, optimizing deductions, and staying informed, you ensure your tax season efforts lay the foundation for financial success well beyond April. Embrace the period as a time to plan, tweak, and solidify your financial future.
Outline of This Episode
- (00:00) Understand how to make informed tax planning decisions and minimize surprises
- (07:18) Regular contributions help make saving manageable and aligned with your long-term financial goals
- 10:23 Significant life changes such as retirement or marriage can drastically alter tax plans
- (12:58) Be mindful of contribution limits when changing jobs mid-year, as 401(k) and HSA limits are combined across employers
- (17:37) In 2025, the standard deduction is $30,000 for married couples and $15,000 for singles, making it challenging to surpass with itemized deductions
- (22:33) Advisers anticipate tax law reversion by 2026; stay informed and flexible to adapt wealth strategies.
Resources & People Mentioned
- Goals of Tax Planning Blog
- Should | Roll My IRA into My 401K to Do a Backdoor Roth? Ep #207
- Planning for Health Insurance in Retirement Pre-Medicare, Ep #205
- Grayson Blazek on LinkedIn
