By Early in your career, doing your taxes can seem like a fairly simple process. Pick your favorite software, plug in a few numbers, and that’s it.
But even as a young professional, being tax-efficient is an important step to achieving your overall financial goals. Here are five things you need to consider before doing the bare minimum each April.
Work with a tax professional.
Let’s be frank: No tax tip I can come up with will hold a candle to using an experienced tax professional to look at your entire tax situation. Our tax code is long and complex, and you can’t expect to know how to navigate it efficiently (and accurately) on your own. If you still choose to file on your own, at least have a tax professional review your returns every couple of years to make sure you’re filing correctly and taking advantage of potential deductions.
Review your withholdings.
Withholdings are basically an estimate of how much you’ll owe in taxes in the upcoming year. If you’re underestimating those taxes, you’re going to be hit with an unexpected bill in April that has the potential to derail your saving goals. If you overestimate, you should get that money back on your return, but you’re also missing out on interest that money could have been making for you during the year. Review your withholdings regularly and make sure you’re as close to the real number as possible. In Kentucky, for example, the state tax rate has been dropping, so check that you’re not overpaying now and missing out on interest later.
Taking advantage of child tax credits and educational savings
You’ve probably heard of the child tax credit that entitles you to up to a $2,200 credit per qualifying child. But there are other tax advantages associated with having children that you may be able to use to your benefit. A popular savings vehicle is to contribute to a 529 for future college expenses. This offers tax-free growth on money that can go toward your child’s education, and, in some states, contributions can lead to deductions at tax time. Consult with your tax professional to see if this could work for your individual situation.
Review your employer retirement plans and options
Your tax bracket is often determined by your adjusted gross income (AGI). Contributing to an employer-sponsored retirement plan like a 401(k) or 403(b) can sometimes lower that AGI, which may get you into a lower tax bracket while being as tax-efficient with your growth as possible. Working with a financial advisor and a tax professional may give you some strategies to lower your AGI and keep you from overpaying to the IRS.
Decide whether to invest in Roth IRAS vs. traditional IRAs
Once you’ve maxed out your employer-sponsored retirement account contributions, consider investing in a Roth or traditional IRA if you are eligible to give yourself multiple buckets to draw from in retirement. Depending on the account type, it’s also another way to potentially lower your taxable income each April. A financial advisor will be able to run numbers and figure out which is the most beneficial vehicle for your investing and tax savings.
If you’re ready to go beyond basic tax filing and start considering your entire financial picture, reach out to our team at Family Financial Partners today. We can take a look at your situation and help you come up with strategies to be tax-efficient so you can focus on saving for your individual goals.
Family Financial Partners does not provide tax advice, but we do coordinate our services and work together with our clients’ tax professionals.
Article by Ryan Petrunyak, Wealth Advisor at Family Financial Partners — a financial services firm in Lexington, Kentucky.