The Ultimate Guide to Tax Savings: 5 Strategies You Need to Know

Written By Ruth Rose | CPA, MST & BEC Tax Director

From Stress to Success

One of our clients was looking at a tax bill of over $356,000 of federal and state tax on 2022 earnings. After analyzing their options and priorities, we recommended:

• Cost Segregation Studies. Cost $5,000, tax savings $167,000;

• Payroll bonus to maximize the QBI deduction. Cost $12,000 in payroll taxes, saved $15,000 in income tax;

• Maximize Solo-k contribution. Cost $0 (money is set aside for the client), saved $22,000;

• Contribution to charitable foundation. Cost $0 (money set aside for charitable work the client was already
  planning to do), saved $90,000;

• Passthrough Entity Tax. Cost $0 (tax would have been paid later anyway), saved $2,000.

The client’s tax bill after implementing these strategies was about $60,000. The cost-benefit ratio on tax planning is incredibly favorable to our clients when the right elements are available – a variety of business entities and activities presents great planning opportunities.

Those Who Fail to Plan…

A lot of folks think that by hiring a CPA, they’re going to save on taxes because – that’s the CPA’s job, right? Well no. The CPA’s job is to prepare a complete and accurate return, getting the best outcome for the client based on documents and information available for the previous tax year. Once the year is over, there is very little that can be done to change the outcome. The CPA will do everything possible to capture deductions and credits, but once the year is over, it’s too late for “planning”.

Tax planning is an essential aspect of financial management that helps individuals and businesses legally reduce their tax liabilities. It involves analyzing financial and tax situations to make informed decisions and take advantage of tax-saving opportunities. Effective tax planning can help save significant amounts of money and ensure compliance with tax laws. In this article, we will discuss some tax planning strategies that individuals and businesses can use to minimize their tax liabilities.

Quick Actions to Reduce Your Burden:

Get Organized

Whether you’re an individual taxpayer or a business owner, it’s important to organize your financial records. Yes, this will help in the event of an audit, but it will also help you capture all of your expenses and tax deductions come tax time. Set up a 2023 tax file NOW, and fill it up with your donation receipts, business expenses, anything that might be tax related. If you’re not sure, drop a copy in your tax folder. Your accountant can omit anything that’s not relevant, but they can’t go find the things you’ve forgotten about. And track your mileage – for business, medical, or charitable purposes. This is a deduction that is often missed for lack of documentation. If you have a lot of deductible miles, try an app like MileIQ, which will track your miles for you.

Take Advantage of Employee Benefits

If you have opportunities to spend pre-tax dollars on medical expenses or child care, do it. This reduces the taxable wages reported on your W2 and results in a much better outcome than deducting these costs as itemized deductions. Health Savings Accounts and Flexible Spending Accounts also reduce the wages that are subject to Social Security and Medicare taxes. Be sure to take advantage of employer-sponsored health insurance coverage, and if that’s not available to you, ask your employer to withhold your premiums pre-tax. The employer will save on employer taxes, so this strategy is a win for everyone involved.

Contribute to Retirement Accounts

Contributing to a retirement account, such as a 401(k) or IRA, can provide significant tax benefits. Contributions to these accounts are typically tax-deductible, meaning they reduce your taxable income. Additionally, the investment earnings on these accounts grow tax-free until you withdraw the funds in retirement. Maximizing your retirement contribution will help you capture any available employer match, which is an immediate and guaranteed return on your investment. Aggressively growing your retirement account will position you to self-direct investments in real estate or business ventures inside of the tax-deferred account in later years.

Plan for Capital Gains and Losses

Capital gains and losses are the profits and losses from the sale of investments or property. By planning for capital gains and losses, you can reduce your tax liabilities. Review your holdings late in the year to see if you should be selling some of your loss positions to offset gains before year end.

Seek Professional Advice

There are many tax strategies available that may or may not fit a particular situation. These require expert analysis and advice to determine if they are suitable. A few examples include:

• • Leveraged Asset Donations

• • Charitable LLCs

• • Maximizing the Qualified Business Income Deduction

• • Cost Segregation Studies

• • Passthrough Entity Tax

• • Entity Structure

• • and more.

Often one strategy will change things up so that another may or may not work to advantage. In our tax planning work with our clients, we run different scenarios to figure out which strategies will accomplish their goals and provide the best return.

Summary

Tax planning is an important aspect of financial management that can help individuals and businesses legally reduce their tax liabilities. By starting early, taking advantage of tax deductions and credits, contributing to retirement accounts, planning for capital gains and losses, organizing your finances, and seeking professional advice, you can develop an effective tax plan and save significant amounts of money in taxes. Be sure to consult your tax advisor anytime a decision might have tax consequences.