Tag: retirement

Tax Planning Doesn’t Start in December

A lot of people start thinking about taxes in December.

They look at their income for the year, start thinking about deductions, make a few last-minute purchases, increase a retirement contribution, and hope there is something they can do before December 31.

The problem is that by December, many tax-planning opportunities are already limited.

Tax planning happens throughout the year — not just in December and not after the year is over.

Why does timing matter?

Many tax decisions need to happen before December 31 to affect that year’s tax return.

Depending on your situation, there may be opportunities involving:

  • Retirement contributions
  • Estimated tax payments
  • Business expenses and equipment purchases
  • S corporation compensation
  • Roth conversions
  • Capital gains and losses
  • Charitable contributions
  • Health savings account contributions
  • Business retirement plans
  • Tax withholding

Some decisions take time to evaluate, and others have deadlines well before the end of the year.

Waiting until tax season can turn a tax-planning opportunity into simply a tax-preparation exercise.

Tax planning is more than finding deductions

Tax planning isn’t just about finding deductions or buying something for your business before December 31.

Sometimes the better strategy is deciding when to recognize income, how much to contribute to retirement accounts, whether to make a Roth conversion, or how a business decision could affect your taxes in future years.

For retirees, this can become even more important. Decisions involving retirement account withdrawals, Roth conversions, Social Security, and required minimum distributions can affect not only federal income taxes, but potentially Medicare IRMAA premiums and other tax thresholds.

Those decisions are much easier to evaluate when you have time.

What does year-round tax planning look like?

For individuals, that may mean reviewing projected income, retirement contributions, investment activity, and other major changes during the year.

For business owners, it may mean looking at profitability, estimated taxes, payroll, equipment purchases, retirement plans, and the overall tax impact of business decisions before the year is over.

You don’t necessarily need a complicated tax strategy. Sometimes a periodic conversation and a look at the numbers is enough to identify an opportunity — or prevent an unpleasant surprise.

Don’t wait until the tax return is finished

Tax preparation tells you what happened.

Tax planning helps you make decisions before it happens.

That is why I encourage clients to think about taxes throughout the year. A mid-year review can give you months to make adjustments. A September or October review can help identify opportunities before year-end. And even after December 31, reviewing the previous year can help build a better plan for the next one.

The goal isn’t simply to prepare your tax return and tell you what you owe.

It’s to help you understand the numbers, plan ahead, and make informed tax decisions throughout the year.

If your tax situation has changed — whether you’ve started a business, changed jobs, retired, purchased property, received a large investment gain, or simply feel like you’re paying more in taxes than you should — it may be worth having a conversation before tax season.

RMD’s? Never Heard of Them

RMD stands for Required Minimum Distribution. In simple terms, once you reach a certain age, the government requires you to start taking money out of certain retirement accounts each year.

For most people, RMDs currently begin at age 73. Under current law, the starting age will increase to 75 for people who reach the applicable age in later years.

RMD rules generally apply to traditional IRAs, SEP and SIMPLE IRAs, 401(k)s, 403(b)s, 457(b)s, and other similar retirement plans. Roth IRAs are different — the original owner generally does not have to take RMDs during their lifetime.

So what’s the big deal?

Your RMD Becomes Part of Your Income

The amount you’re required to take out of your retirement account generally counts as income on your tax return.

That might not sound like a problem. After all, it’s your money.

The issue is that your RMD doesn’t happen by itself. It gets added to everything else you may already have coming in during retirement — Social Security, pensions, investment income, rental income, and other withdrawals.

That extra income can have some unexpected consequences.

It Can Affect Medicare

Higher income can cause you to pay more for Medicare through something called IRMAA.

Medicare can charge higher premiums when your income goes above certain levels. A large RMD could potentially push you over one of those levels, costing you hundreds, if not thousands more in Medicare premiums.

It Can Affect Tax Breaks

Some tax deductions and credits are based on your income.

For example, starting in 2025, people age 65 and older may qualify for an additional $6,000 senior deduction, or $12,000 for a married couple where both spouses qualify. However, the deduction starts to phase out at higher income levels.

Being forced to take an RMD out of your retirement account could potentially reduce some of the tax benefits available to you.

It Can Increase Taxes on Investment Income

If you have significant investment income, such as interest, dividends, capital gains, or rental income, higher overall income can also potentially trigger the 3.8% Net Investment Income Tax.

For example, the income threshold is currently $250,000 for married couples filing jointly and $200,000 for single filers.

Again, the point isn’t that every retiree will run into this tax. The point is that one decision can affect several parts of your tax return at the same time.

Why Planning Should Start Before RMDs

The biggest mistake is waiting until your first RMD shows up.

By then, your options may be more limited.

Planning a few years ahead gives you time to look at your retirement accounts and ask questions like:

How much will my future RMDs be?

Will they push my income into a higher tax bracket?

Could they increase my Medicare premiums?

Could they affect deductions or other tax benefits?

Would it make sense convert the retirement funds into a Roth IRA?

There isn’t one strategy that works for everyone. Sometimes the best move is to leave your retirement accounts alone. Other times, taking action before RMDs begin can make a lot of sense.

The important thing is having the opportunity to make that decision before you’re required to.

Start Planning Before You Need To

Retirement tax planning isn’t something you should start the year you retire — and it definitely shouldn’t start when your first RMD arrives.

The earlier you look at the numbers, the more options you may have.

A good retirement plan isn’t just about figuring out how much money you have saved. It’s also about understanding how and when that money will be taxed.

If you’re approaching retirement or getting closer to RMD age, now is a good time to start looking ahead.

A little planning today can help prevent some expensive surprises later.

At LaVieri CPA & Tax Advisory, we help clients look beyond this year’s tax return and plan for the years ahead.