By Colleen Weber, CFP®, CPA

Historically, tax preparation has been associated with the last-minute scramble to reduce tax obligations. But year-round tax planning shouldn’t be a one-time event. Keeping a close eye on your complete financial situation throughout the year helps you optimize your tax strategy, lower your tax burden, and enhance your overall financial health.

In this article, I share insight into why year-round tax planning is so important, along with tips that make it easy to integrate planning throughout the year into your financial routine. 

Why Year-Round Tax Planning Matters

There are several upsides to tax planning throughout the year. With just a little bit of preparation, you can significantly lessen the stress traditionally associated with tax season. Planning ahead helps you eliminate any uncertainty you have about the deductions you qualify for as well as how much you might owe.

Tips for Year-Round Tax Planning

While it may seem daunting to plan for taxes year-round, it doesn’t have to be. Here are some easy ways to develop good tax-planning habits all year long.

Optimize Tax-Incentivized Accounts

Health savings accounts (HSAs), 401(k)s, and other tax-incentivized funds are your friends when it comes to taxes. It’s good practice, if you can, to contribute as much as possible to these accounts since it reduces your taxable income and helps you save for the future.

Deferring Income

In years when you are earning a higher income, you may want to consider deferring some of that income to future years, especially if you’re nearing retirement. This strategy is available to employees whose company offers a nonqualified deferred compensation plan, which allows you to defer a portion of your current compensation to a later date.

The deferred income becomes taxable only when you receive it, typically after a triggering event, such as leaving the company, retiring, or reaching a specific age. This approach can reduce your current taxable income and potentially lower your tax liability, but you’ll need to weigh the benefits of deferring income against your cash-flow needs and future tax expectations.

Accelerating Income

During lower-income years—such as after job transitions, layoffs, or business downturns—consider accelerating income. This may include increasing work hours or strategically converting traditional retirement accounts into Roth IRAs. The goal is to take advantage of your lower tax bracket by recognizing income sooner rather than later.

Taking Required Minimum Distributions (RMDs)

Once you reach age 73, you’re required to take RMDs from traditional retirement accounts like IRAs and 401(k)s. These withdrawals are subject to income tax and missing them can result in hefty penalties. Managing RMDs effectively requires looking ahead to determine how they might impact other income sources and trigger additional taxes or higher Medicare premiums. One tax strategy to consider is spreading your RMD over the year or converting a traditional IRA to a Roth IRA.

Tax-Loss Harvesting

If you hold investments in taxable accounts, tax-loss harvesting can be a valuable strategy to offset capital gains by selling investments at a loss. This helps lower your taxable income for the year. It’s essential to be aware of the wash-sale rule, which prevents repurchasing substantially identical securities within 30 days of the sale, ensuring the tax loss is valid.

Bunching Deductions

Bunching is a smart tax strategy for people who want to maximize their itemized deductions. By bunching several expenses into one year, you increase the chance of going above the standard deduction amount and being able to itemize your deductions in that year, leading to more significant tax savings.

For example, instead of donating $1,000 to your favorite nonprofit each year, you might donate $10,000 in one year, allowing you to itemize in that year and potentially benefit more from the deduction. Bunching can apply to other expenses as well, such as medical expenses, business expenses, or even contributions to a 529 plan. Just be mindful of certain caps or limitations on deductions, so you can take full advantage of this strategy.

Keep Thorough Records

Pay stubs and receipts shouldn’t be kept in a shoebox. It’s important to know how much you made during the year and how much you’ve spent on items that qualify for tax deductions. Technology is on your side here. Apps and software help you keep track of deductible expenses and can automatically organize and track your budget.

Maintain Receipts for Deductions and Credits

Maintain a record of the money you spend on your business, charitable contributions, and any educational costs. All these expenses are potentially deductible, so it’s important to know the largest amount you can claim.

Modify Your Withholding and Estimated Payments

If you have a job, check your withholding to confirm the amount being deducted matches what you anticipate owing. If you’re self-employed, paying estimated quarterly taxes is a smart way to avoid large and unexpected expenses when tax season rolls around.

Get Ready for Filing Early

This final tip makes tax time significantly less stressful. Know in advance the types of tax documents you receive and start collecting and filing them as soon as possible. Once you’ve organized all your documents, you can go ahead and file your taxes. You don’t have to wait until the last minute!

Partner With a Professional

There’s no reason to let year-round tax planning overwhelm you. By working with Colleen Weber CPA, CFP^®, you’re not just working with a “tax-informed” financial advisor with a passing understanding of tax laws. You’re working with a CPA and fee-only financial advisor in one. 

As part of our wealth management service, we prepare your personal tax returns, which means we’re thoroughly familiar with your specific tax situation. We use that in-depth knowledge to integrate tax mitigation strategies seamlessly with your financial plan so it’s never an afterthought. This approach has helped us save our clients from substantial tax liabilities over many years, and even across generations.

Ready to get in touch? Book a free introductory meeting online or call (952) 470-0750.

About Colleen

Colleen Weber is a fee-only financial advisor, CERTIFIED FINANCIAL PLANNER® professional, and CPA based in Chanhassen, Minnesota. With more than 20 years of financial planning experience, Colleen provides comprehensive financial planning and wealth management. She specializes in serving clients nearing retirement, retirees, busy professionals, and women. She is passionate about developing financial plans that save clients on taxes and investment strategies that help them pursue their goals. Learn more about Colleen by connecting with her on LinkedIn or booking a complimentary phone call meeting.