Tax Planning for Individuals

Tax Planning Basics for Individuals

Recently, I posted information on tax planning for businesses. Of course, it’s not just businesses that can benefit from tax planning. Individuals, whether filing single, married, or married filing single, can benefit from doing a little bit of tax planning.

What is tax planning?

Tax planning is a strategy to lower your tax burden by maximizing deductions and by timing the revenue recognition.

Tax planning for individuals

Tax planning for individuals, not surprisingly, is easier than it is for businesses. True, there are fewer deductions you can take, but it’s easier to know what those deductions are. Here are some suggestions for decreasing your tax burden.

Itemize your deductions                                                                

Everyone is allowed a standard deduction by the IRS. You can take that deduction, or you can itemize your deductions. Things you can itemize include interest on your home mortgage, real estate taxes, medical expenses, and charitable contributions of up to 10% of your adjusted gross income (AGI). The general rule is if your itemized deductions are greater than the standard deduction, you should itemize. There are, of course, exceptions. Everyone’s tax situation is different, and not everyone can itemize. Your tax preparer can help you determine which option is best for you.

Invest in your own retirement

Not only is it a smart thing to do to help ensure you have enough money to live comfortably after you retire, but all or a portion of the amount you contribute to your company-sponsored 401(k) retirement plan or into an individual retirement account (IRA) is deducted from your taxable income.

Currently, you can contribute up to $20,500 to a 401(k) or 403(b) plan, and $14,000 to a SIMPLE (Savings Investment Match Plan for Employees) plan.

If your employer offers a company match to your contribution, take advantage of your their generosity and max out your contribution. Not only will you defer more income, but you will also be building that nest egg at a faster rate.

It’s important to note that you can change the contributions into your company-sponsored retirement plan throughout the year. Check with your employer or benefits administrator for more information.

Contributions to a traditional and Roth IRAs are limited to $6,000 per year with $1,000 of catch-up contributions allowed for individuals age 50 and older.  If you are covered by a retirement plan at work, your contribution to a traditional IRA may be limited. Also, you can put money into an IRA up to the day you file your tax return, excluding extensions—even if it’s Tax Day—and that will count as a deduction for the taxes you are filing.

It is best to take to a financial advisor or your tax preparer about the variety of retirement investments available to you. Remember, though some contributions you make to a retirement plan may not be tax deductible, they are wise investments for your future.

Understand the tax implications of mutual funds and stock sales

If you sell some of your investments, you have to report the capital gain or loss on the sale. If held short-term (one year or less) the tax on the gain is higher than that of long-term gains (held more than one year.)

Capital losses can be deducted up to the amount of capital gains. Keep in mind that short-term losses can only be netted against short-term gains and long-term losses can only be netted against long-term gains. If your capital losses exceed your capital gains you can deduct up to $3,000 of the loss. Any losses not deducted can be carried forward to the next year.

Again, it’s best to discuss with your financial advisor or tax planner to determine what investments to sell for the best tax implication.

Document everything: individual edition

Using a tool like a spreadsheet program or your preferred method of record keeping, you should document all your charitable contributions, medical expenses and mileage.  Be ready and organized by keeping all of your tax-related documents (W-2s, 1099-INT, etc.).  My favorite means of documenting is a tax deduction file from Dome or a folder by Smead. You can purchase these at your favorite office supply store.

Start planning

If one of your financial goals is to lower your tax burden, it’s important to talk to your tax preparer and/or your financial advisor and to act. It’s never too late—or too early—to start tax planning.