Paying taxes and filing returns affects nearly all of us. When asked “how much tax do you pay,” most of us would answer, “too much.” Although we generally agree with that consensus, people are sometimes surprised to see the actual percentage they pay in taxes. Even more surprising is the fact there are ways you can proactively take steps to better manage the taxes you pay over a lifetime.
Most tax planning and tax advice involves reducing current year taxes – make an extra charitable contribution this year, don’t worry about your mortgage since you can deduct its interest, contribute to pre-tax retirement accounts, and other strategies. In other words, maximize tax deductions and credits as soon as they’re available to reduce current taxes.
These strategies can be helpful for many taxpayers, but proper tax planning does not include a one-size-fits-all blanket approach based on today alone. We must consider that we have to pay taxes today, but we will also likely pay taxes over the rest of our lives. If we focus our tax planning on just the current year, we may lose opportunities to reduce lifetime taxes by taking another more holistic approach. It may be beneficial to proactively choose to pay more taxes in the current year. Here are a few circumstances where that may be true: early in your career, in your early retirement years, when starting a new business, or when facing a relatively low tax environment like we currently do here in the United States.
We believe we should keep an open mind when it comes to taxes. It might not best suit you to default all your savings into a pre-tax 401(k). Cash, Roth, and taxable investments are other valuable tools which have their place in a thoughtfully-planned investment portfolio. We encourage taxpayers to take time to learn and understand their tax circumstances to avoid losing opportunities in any given tax year.
If you’re not sure where to start, we can help.
