When Is the Best Time to Start Tax Planning?

For most, taxes are top of mind for a brief (and often dreaded) period each year during tax season. For the rest of the year, many people take an ‘out of sight, out of mind’ approach to the topic. However, the reality is that holistic tax planning isn’t just a once-a-year task—it’s an ongoing process that can significantly impact your financial well-being. By taking a proactive approach, you can minimize surprises, maximize savings, and make more informed decisions about your money. That means the best time to start tax planning is now.

At Truepoint, we work with our clients year-round to align their tax strategies with their overall financial goals. Here’s how you can adopt this forward-thinking approach to your own tax planning. 

Start Early in the Year 

January is an ideal time to take stock of your financial picture and set the tone for the year. Early in the year, take some time to start tax planning:

• Review Your Paychecks: Check your pay stub to ensure your withholdings are on track. Adjusting early can help avoid surprises at tax time.

• Update Your Savings Rates: Confirm you’re contributing the maximum to tax-advantaged accounts like 401(k)s or HSAs.

• Plan for Equity Compensation: If you have stock options or other equity compensation, review exercise or expiration dates and assess the tax implications for the year ahead.

• Strategize Your Retirement Contributions: Decide whether to direct savings to a Roth or traditional 401(k), depending on your anticipated future tax rate. A Roth 401(k) offers tax-free growth and is often advantageous for younger savers or those expecting higher tax rates later in life.

Check In Mid-Year

The middle of the year is a great time to check in on your progress and make adjustments to stay on track: 

• Review Your Income and Withholdings: Assess whether any unexpected income or changes in employment have affected your tax situation. If needed, update your withholdings to avoid a large tax bill or refund.

• Track Investment Performance: Monitor your portfolio for gains or losses. Mid-year is a good time to consider strategies like tax-loss harvesting or rebalancing.

• Evaluate Your Charitable Giving: If you’re planning to make charitable contributions, evaluate whether you’re on pace to meet your giving goals. Spreading donations throughout the year can help you stay organized and take advantage of tax benefits by year-end. Additionally, mid-year is a good time to explore donor-advised funds or bunching donations if you anticipate itemizing deductions.

Make Time for End-of-Year Planning

The last quarter is your final opportunity to fine-tune your tax strategy and make impactful financial decisions. Before December 31, you might want to: 

• Address Surprises: Review any unexpected changes from earlier in the year, such as capital gains or dividends, and determine if you can offset these gains with losses from your portfolio.

• Finalize Your Charitable Giving: Confirm whether your charitable contributions bring you above the standard deduction threshold, allowing you to itemize deductions. If not, consider “bunching” donations into the current year to maximize the tax benefit. Explore options like donating appreciated assets, which can provide a tax-efficient way to support the causes you care about while avoiding capital gains taxes.

• Plan Roth Conversions: If your tax rate is favorable, moving funds from a traditional IRA to a Roth IRA can set you up for tax-free growth. Be sure to calculate the potential tax impact and decide if it’s a strategic move.

• Maximize Tax-Advantaged Accounts: If you haven’t reached the annual contribution limits for accounts like 401(k)s, HSAs, or 529 plans, make additional contributions before year-end. These can reduce your taxable income and help you save for the future.

• Consider Timing Income and Deductions: If you anticipate a change in your tax bracket next year, think about whether you should accelerate income or defer expenses to optimize your tax liability.

Why Plan Year-Round? 

Tax planning isn’t just about reducing your tax bill – it’s about aligning your tax strategy with your broader financial goals. By starting early and revisiting your plan throughout the year, you’ll maximize your options and create opportunities for long-term savings. 

Want to ensure you’re making the most of every tax season? Let’s talk about how our team can help you plan smarter year-round.