Top Tax Planning Strategies For After You File
You've filed your 2021 return: now what? The real fun begins. Here are some tax planning strategies you can consider throughout the year.
Send Us Your Completed Return
Once the tax deadline passes, it’s easy for your taxes to stray out of sight and out of mind, but we can actually learn a lot from reviewing your completed returns. A thorough analysis allows for a second set of eyes to ensure no one missed anything in the filing process and that no mistakes were made. Don’t worry; if there is an error, you can file an amended return and sort everything out. In addition to basic housekeeping, examining your return opens the potential for future tax planning opportunities. At The Dala Group, we ask that clients upload their final (and completed) tax returns into our secure document vault so that we can analyze the returns for them. What tax planning opportunities might we find throughout the process? Here are some to keep in mind.
Max Out Your 2022 Retirement Plan Accounts
The contribution limit for employee elective deferrals for most employer-sponsored retirement plans, like a 401(k), is $20,500 in 2022. For those 50 and over, that limit increases to $27,000 per year. If you did not max out your retirement plan account for 2021, aim to increase your contribution percentage as you look ahead to 2022. Are you already maxing out your employer-sponsored accounts? Fantastic! Here’s what you might consider next.
After-Tax 401(k) Contributions
Many 401(k) plans allow employees to contribute after-tax dollars over and above the $20,500 limit noted above. While these extra contributions won’t lower your taxable income, it does provide an opportunity to sock away a lot more money into a tax-advantaged retirement account. After-tax contributions can be an excellent option for high-earners with excess cash flow who are already maxing out primary saving areas. By doing so, you could also take advantage of the Mega Backdoor Roth Conversion strategy. More on this strategy is below!
Make The Most of Your Roth Accounts
As you look ahead to the rest of 2022, consider all of your options regarding the Roth (or tax-free) bucket of your retirement savings.Think through the following:
Is it worth saving more into your 401(k) via pre-tax contributions or Roth contributions?
If your 401(k) Plan allows for after-tax contributions, is it sensible to take advantage of Mega Backdoor Roth Conversions?
Keep Your Investments Tax-Efficient
Ensuring the tax efficiency of your investments is critical to controlling how much taxes you pay each year. Two long-term strategies to help are,
Asset location
Long-term capital gains
Asset location is the strategic decision to place specific assets within set accounts based on the tax treatment inherent in the accounts. Let’s make that more digestible. For example, if you want to lower your taxable dividend income, you may hold more of your value stocks (that typically give dividends) in your 401(k) or Traditional IRA. In contrast, if you held those same value stocks in your taxable brokerage account, you would be taxed on the dividend income in the year that you received the dividend. With tax-advantaged retirement accounts, that is not the case. It’s also important to prioritize long-term capital gains, which specifically apply to your taxable brokerage account. Whether rebalancing throughout the year or short-term cash needs, you will be taxed at a lower rate if you sell positions that have long-term capital gains, aka assets you’ve held for at least a year. For most taxpayers, the long-term capital gains rate will be 15%, which is typically lower than ordinary income tax rates (how the IRS taxes short-term capital gains).
Create A Plan for Your Equity Compensation
Equity compensation can get complicated quickly. However, the best approach is to understand exactly what you have and then create a plan that makes sense for your goals, tax situation, and holistic portfolio. Below are the key questions to ask yourself as you plan for your equity compensation:
Will any shares vest soon?
Do you want to exercise?
How will you fund the event?
How can you make the most of your equity this year?
How are you considering your equity compensation within your diversified portfolio?
If you’re looking for more equity compensation insights, we wrote an entire series dedicated to the most common forms you’ll come across, like ISOs, RSUs, and ESPPs. These articles would be a great start as you consider your annual equity comp planning.
Make A Charitable Giving Plan
When it comes to giving, it should always come from a place of serving others, helping worthy causes, and making the world a better place. What’s great about charitable giving is that you can do all of these things and save a little money on taxes. If you already donate to charity, be sure you
Have an annual plan
Consider your long-term giving strategy.
There are many ways to give, such as sending a check directly to a charitable organization, donating appreciated stock, or utilizing a Donor Advised Fund (DAF). No matter what you choose, try to do so in the most tax-efficient manner, given your situation. For example, if you are retired and taking your RMD (Required Minimum Distribution), it may be advantageous to consider a Qualified Charitable Distribution (or QCD). A QCD allows you to avoid paying taxes on your RMD while also giving to a charitable organization. This could be an excellent option for a retiree already charitably inclined and does not need all of their RMD for regular income needs.
Ensure That Your Financial Professionals Know Each Other
You want your financial plan to have a cohesive strategy, which means that every area of your plan should work together. To help foster a sense of unity and clarity regarding your plan, be sure your financial planner and tax professional are in sync. By creating introductions in-person, over the phone, or simply via email, you open a line of communication, allowing for more coordination that ultimately aligns with your best interest. When everyone can work together, you and your money benefit.
We Can Help
Just because you’ve filed your taxes doesn’t mean that conversations about tax planning stop. By thinking strategically year-round, you can get ahead of a higher tax bill come the next filing season. We help our clients consider the big picture regarding proactive tax planning—all within the context of comprehensive financial planning. Ready to learn more? Reach out today.
This commentary reflects the personal opinions, viewpoints, and analyses of The Dala Group, LLC employees providing such comments. It should not be regarded as a description of advisory services provided by The Dala Group, LLC or performance returns of any The Dala Group, LLC client. The views reflected in the commentary are subject to change at any time without notice. Nothing in this commentary constitutes investment advice, performance data, or any recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The Dala Group, LLC manages its clients’ accounts using various investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
