Proactive tax planning: 7 steps

The U.S. tax code is vast and complicated. To take advantage of all the tax-savings opportunities available to you, start planning for your income taxes well before the April filing deadline set by the IRS.

My team, along with your tax professional, will help you understand your options — from tax brackets to withholding strategies — based on your needs and financial goals.

To get started, here’s how to take a proactive approach to tax planning: 

In this article:

1. Understand your tax bracket
2. Review your withholding amounts so you're not under — or over — paying
3. Reduce your taxable income
4. Determine if you need to make estimated tax payments
5. Determine whether you'll itemize or take the standard deductions
6. Plan ahead for what you may owe the IRS at tax time
7. Keep your tax documentation in a central location
8. Questions to discuss with us

1. Understand your tax bracket

The U.S. uses a progressive tax system, which means that the more income you make, the more you typically pay. There are currently seven federal income tax brackets — 10%, 12%, 22%, 24%, 32%, 35% and 37% — and which one you fall in will depend on your filing status and income.

Knowing your tax bracket can help you with various aspects of your finances, including determining how much to withhold from your paycheck or how any changes in your income could affect your taxes moving forward. If you are on the threshold of a higher or lower bracket, certain tax strategies can also help you manage your taxable income so you’re not surprised at tax filing time.

Learn more: Tax brackets for 2023-2024

2. Review your withholding amounts so you’re not under — or over — paying

If you consistently receive a large tax refund after filing your taxes, you are likely withholding too much money from your paycheck. On the other hand, if you consistently owe a large amount of money, you’re likely withholding too little.

If your finances are relatively straightforward, you can avoid both scenarios by using the IRS tax withholding estimator, which allows you to see how different numbers could affect your refund, take-home pay or taxes you owe. If you decide to adjust your withholding, know you can submit a new Form W-4, Employee’s Withholding Certificate — the IRS form you give to your employer to indicate how much you want withheld from your paycheck — at any time.¹

If your finances are more complex — especially if you’re a business owner — you will want to consult a tax professional.

3. Reduce your taxable income

There are various ways to reduce your taxable income in any given year. Here are the most common:

• Save pre-tax dollars in your 401(k) account.
• Maximize deductions and credits.
• Contribute to a health savings account (HSA).
• Utilize tax-loss harvesting.

Learn more: 8 ways to potentially lower your taxes

4. Determine if you need to make estimated tax payments

Estimated tax payments are paid to the IRS throughout the year on earnings that are not subject to federal tax withholding. If you fall into one of the following groups, you may be required to make estimated tax payments:

• You are self-employed or earn significant income from freelancing or side jobs.
• You make substantial income from dividends, realized capital gains, prizes or other non-wage earnings.

A tax professional can help you determine if you need to make estimated payments and how much.

5. Determine whether you'll itemize or take the standard deductions

When you file a federal income tax return, you choose between claiming the standard deduction or itemizing your deductions. The standard deduction lowers your income by a fixed amount according to your filing status, while itemizing allows you to deduct eligible expenses you incurred during the year. Common expenses you can itemize (subject to certain limitations) include mortgage interest; state and local taxes; property taxes; charitable donations; and medical and dental expenses that exceed 7.5% of your adjusted gross income.

To determine which method may make sense for you, add up eligible deductions you may have for the year and see whether the number exceeds the standard deduction amount. If it does, you should itemize. If your finances are more complex, however, we — alongside your tax professional — will help you make this choice.

If you think that itemizing may work for you in a given tax year, it’s helpful to start strategizing about deductions early so that you can maximize any deductions available to you.

6. Plan ahead for what you may owe the IRS at tax time

Failure to pay your taxes by the deadline can result in substantial penalties and interest fees. If you suspect you may owe taxes to the IRS, automatically setting aside money on a regular basis for this purpose is one of the simplest ways to help ensure you’re able to pay your tax bill in full and by the deadline. If time allows, you can also adjust your paycheck withholding anytime during the year. 

Another alternative to consider if you don’t want to use cash or liquidate assets to pay your bill is securities-based lending. This allows you to borrow against your portfolio of non-retirement, marketable securities — such as stocks, bonds and mutual funds — for a line of credit, providing liquidity while keeping long-term investments intact.

7. Keep your tax documentation in a central location

When filing your taxes, much of the work is locating the records you’ll need to reference. As you receive these documents — including receipts, medical bills and property tax documentation — consider organizing them securely in a central location. This will help reduce stress when it’s time to file.

Proactive planning can help lessen your tax burden

Whether you’re wondering about your tax bracket, worried about withholding too little or want to lower your taxable income, we will work with your tax professional to create a tax planning strategy that reflects your needs and financial goals.