Proper tax planning is an important part of a sound financial plan. But you need to be proactive. Ignoring your tax bill will have you surrendering lots of cash to the tax authorities. Luckily, there are some tax reduction strategies you can adopt now to reduce your tax bill and use the money elsewhere.
1. Offset Your Capital Gains Taxes
Capital gains are simply the taxes you pay when you sell an asset that has appreciated. If you have lots of assets, chances are that you will have to pay this tax sooner or later. Capital gains taxes are often lower than regular income if you have held the property or asset in question for more than 12 months. Any losses that you get can give you tax relief.
With that in mind, you can sell a depreciating asset with an appreciating investment to offset your capital gains tax. For example, you can sell a stock that has been on the rise for years with another company's stock that has been plummeting. Since capital gains tax rates may increase, you can take this chance to offset your gains.
2. Consider Roth Conversions
Most people believe they will be in a lower tax bracket when they retire, which will reduce their taxes when withdrawing their pension. But this may not be the case if you have social security benefits, retirement income, dividends, and other interest payments. You may end up paying more in taxes and have to lower your standard of living.
Roth IRA conversions offer a great way to avoid such high tax rates. You only pay taxes on the cash you convert, and the money grows without attracting taxes. Moreover, you will not have to pay any tax during withdrawals. It may be painful to pay taxes upfront, but this saves you many headaches in the future.
3. Make Charitable Contributions
Giving to charity used to be just writing a check to your favorite organization. But you now have specific charitable giving strategies and tools that can help you reduce your taxes.
You can enroll for any donor-advised funds — special funds created to give back to charity. Such funds will give you tax deductions regardless of whether the fund released the donations to charity.
Using a Required Minimum Distribution is another way to save on taxes. You can set these minimum distributions to go to charitable organizations and get tax relief in return.
4. Give Your Wealth Away While Living
Giving away your wealth while alive has become popular for two reasons. First, you may be able to move funds out of your estate without tax consequences. Secondly, you get the chance to see the impact of this gift on your loved ones. In 2022, the gift tax exclusion has increased to $16,000. And since the exclusion applies per individual, it allows you to give up to $16,000 to as many people or organizations as you can afford.
If you are interested in learning more about what tax strategies may benefit your situation, please reach out to one of our experienced financial advisors. We would love to help you keep more of your hard-earned money.