8 Things You Should Know About Maximizing Tax Savings with a Financial Planner

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As we look ahead to the fiscal landscape of 2024, the Internal Revenue Service (IRS) has announced several policy adjustments. Due to this, individuals and families across the United States are poised to navigate a tax environment marked by significant shifts in brackets, deductions, and savings opportunities. With the IRS rolling out a 5.4% adjustment to tax brackets for 2024—tailored to cushion the impact of inflation—taxpayers find themselves at a significant juncture where strategic planning could yield considerable financial advantages.

The adjustments introduce a scenario where the standard deduction rises by $750 for single filers to $14,600 and by $1,500 for married couples to $29,200, offering a broader canvas for taxpayers to reduce their taxable income. This change, though seemingly modest, has broader inflationary trends and their ripple effects across personal finance domains at the core.

Furthermore, the enhanced contribution limits for 401(k)s, IRAs, and HSAs underscore a growing recognition of the need for robust, forward-looking strategies to secure financial wellness in an era marked by uncertainty. For many, these adjustments could translate into tangible tax savings and thus point toward the nuanced opportunities and challenges that lie ahead.

In light of these changes, many of us wonder how to reduce taxes owed to the IRS. While it is important to be well-versed with the new rules to achieve this, navigating this evolving tax landscape demands more than a cursory understanding—it calls for an informed approach to tax planning. Consider consulting with a financial advisor who can help unlock a spectrum of tax savings opportunities tailored to your unique financial situation. From optimizing deductions and navigating the intricate web of tax brackets to making informed decisions on retirement contributions, the role of a financial advisor in maximizing tax savings has never been more critical.

In this article, we will talk about how you can maximize tax savings with a financial planner, focusing on tax tips for individuals and families alike.

Below are 8 things you should consider to maximize tax savings with the help of a financial planner:

1. It is important to understand your tax situation

A good understanding of your tax situation is key to making informed decisions that can significantly impact your financial health. At its core, this understanding revolves around knowing your tax bracket, the deductions you're eligible for, and the credits that can reduce your tax bill dollar for dollar.

Your tax bracket indicates the rate at which your income will be taxed. The United States uses a progressive tax system, meaning that as your income increases, so does the rate at which it is taxed. However, it's important to note that being in a higher tax bracket doesn't mean all your income is taxed at that higher rate, but rather just the income within that bracket's range.

Deductions reduce the amount of your income that is subject to tax, which can potentially lower your tax bracket and, consequently, the amount of tax you owe. Common deductions include those for retirement account contributions, mortgage interest, and charitable donations.

Tax credits are even more valuable than deductions because they reduce your tax bill on a dollar-for-dollar basis. There are various tax credits available for a wide range of activities and situations, including education expenses, energy-saving home improvements, and childcare.

The role of a financial advisor is invaluable here. They bring personalized insights into your financial situation, helping you navigate the complex web of tax laws. They can assess your overall financial picture and recommend strategies to lower your taxable income, maximize deductions and credits, and ensure you're making the most of investment opportunities for tax-advantaged growth.

Additionally, they also stay updated on the latest tax laws and can offer tailored advice based on the most current regulations. Whether it's deciding between taking the standard deduction or itemizing, understanding the implications of new tax laws, or planning for significant life events like buying a home or saving for college, a financial advisor can provide guidance tailored specifically to your needs and goals.

Knowing your tax situation and working with a financial advisor can, thus, unlock potential savings and make a significant difference in your financial strategy, not just for the current year but for your long-term financial well-being.

2. You can adopt strategies for reducing taxable income

Reducing your taxable income can have a significant impact on your financial health, directly affecting how much tax you owe each year. There are several strategies you can employ to minimize your taxable income, such as contributing to retirement accounts, utilizing health savings accounts (HSAs), and investing in education savings plans. Each of these strategies not only helps in lowering your current tax bill but also plays a crucial role in securing your financial future.  Some of them have been detailed below:

  1. Retirement contributions: One of the most effective ways to reduce taxable income is by contributing to retirement accounts such as 401(k)s and IRAs. These contributions are often tax-deductible, lowering your gross income. For example, contributing the maximum allowed amount to these accounts can significantly reduce the income you're taxed on, while also preparing for retirement. For 401ks, the annual limit on employee contributions is set at $23,000 for the year 2024. Workers aged 50 and over have the option of contributing an additional $7,500 catch-up contribution to boost their retirement savings. For IRAs, the maximum contribution limit is capped at $7,000. If you are 50 and up, you can make an additional catch-up contribution of $1,000 to your IRA.
  2. Health savings accounts (HSAs): HSAs are another tax-advantaged way to reduce taxable income. These accounts allow individuals with high-deductible health plans to save money pre-tax for medical expenses. Contributions to an HSA are deductible from your gross income, thereby reducing your taxable income. In 2024, an individual can contribute a sum of $4,150 to their HSA while for a family it stands at $8,300. In addition, individuals age 55 or older can make catch-up contributions of $1,000 on top of their annual contributions to HSAs. HSAs also have the benefit of tax-free growth, meaning you won’t pay taxes on the account’s earnings, and can make tax-free withdrawals for qualified medical expenses.
  3. Education savings plans: Investing in education savings plans like 529 plans can also offer tax advantages. While contributions to these plans are not deductible from federal taxes, many states offer tax deductions or credits for contributions to a 529 plan. Additionally, the investment growth in these accounts is tax-free when used for qualified education expenses, providing a way to save for education while reducing taxable income over time.

Optimizing the strategies with a financial planner

A financial planner can be instrumental in helping you choose and optimize strategies based on your unique financial situation. They can offer personalized advice on how much to contribute to each type of account, based on your income, tax bracket, and long-term financial goals. Financial advisors also stay up-to-date on changes in tax laws and can adjust your strategy accordingly to ensure you’re always maximizing your tax savings.

For example, a financial advisor might recommend a Roth IRA over a traditional IRA if they believe you'll be in a higher tax bracket in retirement, providing tax-free income in your retirement years. Similarly, they could advise on the timing of HSA contributions or withdrawals to maximize tax advantages or suggest reallocating investments within a 529 plan based on changing educational goals or market conditions.

3. You can maximize deductions and credits

Maximizing deductions and credits is a vital part of reducing your tax bill, yet many taxpayers miss out on these benefits either because they're unaware of them or don't understand how to claim them properly.

Common deductions and credits:

  1. Mortgage interest deduction: Homeowners can deduct interest paid on up to $750,000 of mortgage debt, which can significantly lower taxable income.

  2. Charitable contributions: Donations to qualified organizations can be deducted, including cash and, in some cases, the value of donated goods.
  3. Education expenses: The American Opportunity Credit and the Lifetime Learning Credit can offset the costs of education, with the former offering up to $2,500 per student and the latter up to $2,000 per tax return.

Often overlooked deductions and credits:

  1. State sales tax: Taxpayers have the option to deduct state income tax or state sales tax paid. For those living in states without an income tax or who made large purchases, deducting state sales tax can be beneficial.
  2. Medical expenses: Expenses exceeding 7.5% of your adjusted gross income can be deducted, including payments for doctors, surgeries, and some health insurance premiums.
  3. Energy-efficient home improvements: Credits for installing energy-efficient systems in your home, such as solar panels or energy-efficient windows, can reduce your tax bill.

The role of a financial advisor in maximizing deductions and credits

A financial advisor plays a crucial role in ensuring you take full advantage of the available tax benefits. Here's how:

  1. Tailored advice: Financial advisors provide personalized recommendations based on your financial situation, helping identify which deductions and credits you qualify for.
  2. Strategic planning: They can suggest strategic moves, like bunching charitable contributions in a single year to surpass the standard deduction limit, thereby maximizing the tax benefit.
  3. Documentation and record-keeping: They can advise on what records to keep and how to track expenses throughout the year, making it easier to claim deductions and credits during tax season.

By working with a financial advisor, you can navigate the complexities of tax deductions and credits more efficiently, ensuring you don’t leave money on the table.


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4. Investment decisions vary in their tax implications

Investment decisions play a crucial role in shaping your financial future, but they also have significant tax implications that can affect your overall tax liability. Understanding the tax consequences of different investment choices can help you make informed decisions and reduce your tax bill.

Tax implications of investment choices

  1. Stocks and bonds: Capital gains tax applies to profits from selling stocks and bonds. Short-term capital gains (investments held for one year or less) are taxed as ordinary income, while long-term gains (held for more than a year) benefit from lower tax rates.

  2. Dividends: Dividends are typically taxed at a lower rate than ordinary income, though the rate depends on whether they're considered qualified or non-qualified.
  3. Real estate investments: Profits from selling real estate are subject to capital gains tax, but expenses and depreciation can offset some income. Additionally, real estate investments can sometimes qualify for a 1031 exchange, allowing you to defer capital gains taxes.
  4. Retirement accounts: Traditional IRAs and 401(k)s offer tax-deferred growth, meaning you won't pay taxes on earnings until you withdraw the funds in retirement. Roth IRAs and 401(k)s, however, are funded with after-tax dollars, allowing for tax-free growth and withdrawals.

Role of a financial advisor in increasing the tax efficiency of your investments

A financial advisor can significantly enhance your ability to make tax-efficient investment decisions through:

  1. Personalized strategy: They can develop a personalized investment strategy that aligns with your financial goals while minimizing tax liabilities, considering factors like your income, tax bracket, and long-term objectives.
  2. Tax-loss harvesting: Financial advisors can implement tax-loss harvesting strategies to offset capital gains with losses, thereby reducing your taxable income.
  3. Asset location: They can advise on the best types of accounts (taxable vs. tax-advantaged) for holding different investments based on their tax treatment to optimize after-tax returns.
  4. Retirement planning: Financial advisors can help decide between traditional and Roth retirement accounts based on your current tax bracket and expected future tax situation.
  5. Estate planning: For investors concerned about legacy planning, financial advisors can recommend strategies to minimize estate taxes and ensure a smoother transfer of assets to heirs.

5. You can optimize taxes while planning for major life events

Major life events such as marriage, purchasing a home, or retirement can have significant tax implications that may impact your financial well-being. Understanding these implications and proactively planning for them is essential for optimizing tax savings.

  1. Marriage: If you were already confused regarding how to save on taxes as a single person, marriage can complicate it further. It can result in changes to your tax filing status, potential eligibility for new tax credits and deductions, and adjustments to tax rates. For example, married couples may benefit from lower tax rates and higher income thresholds for certain deductions and credits. However, it's essential to consider how combining incomes may affect your overall tax liability.
  2. Purchasing a home: Homeownership introduces various tax benefits, including deductions for mortgage interest, property taxes, and potentially mortgage insurance premiums. Additionally, certain home improvements may qualify for tax credits or deductions. However, it's crucial to understand the tax implications of selling a home, such as capital gains taxes, if the property value appreciates.
  3. Retirement: Transitioning into retirement involves navigating a new tax landscape, as income sources may change, and withdrawals from retirement accounts become necessary. Proper retirement planning can help minimize taxes in retirement by strategically timing withdrawals, maximizing Social Security benefits, and utilizing tax-efficient investment strategies.

How financial advisors can help with planning for major life changes while increasing tax efficiency?

Financial advisors play a vital role in helping individuals navigate these major life events for optimal tax savings:

  1. To develop a customized tax strategy, they can assess your unique financial situation, including your income, assets, and goals.
  2. Financial advisors can guide you on how to take advantage of available tax credits, deductions, and retirement savings opportunities.
  3. They can help you understand the tax implications of various options related to major life events, such as choosing between renting and buying a home or deciding when to claim Social Security benefits.

6. Estate and gift tax planning can be helpful

Estate and gift tax planning is essential for preserving wealth and minimizing tax liabilities when transferring assets to heirs or beneficiaries. Understanding the complexities of estate and gift taxes can help individuals create a tax-efficient estate plan.

  1. Estate tax considerations: The estate tax applies to the transfer of assets upon death if the total value of the estate exceeds a certain threshold. In 2024, the federal estate tax threshold stands at $13.61 million for individuals. This implies that married couples can avoid estate taxes if the combined value of their estate is $27.22 million or less. Proper estate planning can help minimize estate taxes through strategies such as gifting, trusts, and charitable giving.
  2. Gift tax considerations: The gift tax applies to transfers of money or property during one's lifetime, exceeding certain limits (currently $18,000 per recipient in 2024). Financial advisors can assist individuals in utilizing annual gift tax exclusions, lifetime exemptions, and other gifting strategies to minimize gift tax liabilities.

The role of financial planners in achieving a tax-efficient estate plan

Here’s how financial advisors can provide invaluable assistance in creating a tax-efficient estate plan:

  1. They can assess your estate planning goals and objectives, taking into account your financial circumstances and family dynamics.
  2. Financial advisors can recommend estate planning strategies tailored to your needs, such as establishing trusts, creating charitable giving plans, and implementing tax-efficient asset transfer techniques.
  3. They can coordinate with estate planning attorneys and tax professionals to ensure that your estate plan aligns with your overall financial objectives and complies with applicable tax laws and regulations.

7. Business owners require a unique approach to tax planning

Entrepreneurs and business owners face unique tax considerations that can significantly impact their business's profitability and personal finances. Understanding these tax implications and implementing tax planning strategies is crucial for maximizing tax savings and achieving long-term financial success. Below are some ways in which you can achieve this as a business owner:

  1. Entity selection: Choosing the right business entity structure (e.g., sole proprietorship, partnership, corporation) can have significant tax implications, affecting factors such as income taxes, self-employment taxes, and liability protection. Financial advisors can help business owners evaluate the tax advantages and disadvantages of different entity structures and make informed decisions based on their specific circumstances and goals.
  2. Tax deductions and credits: Business owners may be eligible for various tax deductions and credits, such as those for business expenses, depreciation, research and development, and hiring certain employees. Financial advisors can assist business owners in identifying and maximizing available tax deductions and credits to reduce their taxable income and lower their tax liability.
  3. Retirement planning: Business owners can benefit from tax-advantaged retirement plans, such as SEP-IRAs, SIMPLE IRAs, and solo 401(k)s, which offer tax-deferred growth and potential tax deductions for contributions. Business owners can select and implement the right retirement plan for their business and retirement goals, taking into account factors such as contribution limits, administrative costs, and employee eligibility requirements.

How financial planners can help?

Financial advisors can offer valuable guidance and support to business owners in navigating complex tax issues and optimizing tax savings in the following ways:

  1. Data analytics: They can review and analyze business financial statements, tax returns, and cash flow projections to identify opportunities for tax savings and optimization.
  2. Strategizing: Financial advisors can collaborate with tax professionals and legal advisors to develop comprehensive tax planning strategies that integrate with overall business and personal financial planning objectives.
  3. Continuous review and monitoring: They can provide ongoing monitoring and review of tax planning strategies, making adjustments as needed to adapt to changes in tax laws, business conditions, and personal circumstances.

8. Tax Laws and policy changes can significantly impact financial plans

Staying informed about tax law changes is crucial for individuals and businesses alike, as these changes can significantly affect financial planning strategies and tax liabilities. Understanding the implications of tax laws and policy changes allows individuals to adapt their financial plans accordingly and take advantage of available opportunities for tax savings.

How financial planners can help decode complex tax laws and policy changes?

Financial advisors play a vital role in helping their clients navigate the complexities of tax laws and policy changes:

  1. They stay up-to-date on legislative updates and changes to tax laws to ensure that their clients are informed of any potential impacts on their financial situations.
  2. Financial advisors proactively monitor proposed tax legislation and anticipate how it may affect their clients' tax liabilities and financial goals.
  3. They provide guidance and recommendations on adjusting financial strategies in response to changes in tax laws, helping clients optimize their tax planning strategies.
  4. Financial advisors leverage their expertise and knowledge of tax laws to identify new opportunities for tax savings and help clients capitalize on them.
  5. They work closely with tax professionals and legal advisors to ensure that their client's financial plans are compliant with current tax regulations and optimize tax efficiency.

To conclude

Tax laws and policy changes evolve and leveraging them to improve tax efficiency requires careful planning and a deep understanding of how these changes can impact your financial situation. By staying informed about tax regulations and working with a knowledgeable financial advisor, you can optimize your tax-saving strategies and secure a prosperous financial future.

By providing personalized insights, strategic guidance, and ongoing support, financial advisors can help you navigate the complexities of the tax code and identify opportunities to minimize your tax liability while maximizing your financial well-being.

Use the free advisor match service to get matched with vetted financial advisors who can provide personalized insights, strategic guidance, and ongoing support to help you navigate the complexities of the tax code and identify opportunities to minimize your tax liability and maximize your tax savings. Answer some simple questions about your financial needs, and our match tool can help connect you with 2 to 3 advisors who can best fulfill your financial requirements.

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.