The holidays can be a hectic time for everyone, with family gatherings, shopping, and celebrations taking center stage. However, taking a little time now to focus can also bring a sense of empowerment and control over one's financial future.
Don't wait until next year to get started.
Once we hit January of next year, what happened this year is done, and it is no longer possible to change the outcome (other than funding a Traditional IRA or SEP retirement plan, if eligible)
Tax planning should be as regular as changing your socks because nobody wants a financial mess. By planning ahead, we may be able to reduce taxes or maximize tax brackets through tax-loss harvesting, finding deductions, or converting IRAs to Roth IRAs.
Assumptions about the future are challenging.
Making assumptions about taxes in the future can be a challenging task due to the ever-changing nature of tax laws and policies. It is like trying to hit a moving target while blindfolded and riding a unicycle!
The Tax Cuts and Jobs Act of 2017, which reduced taxes for most of us, will sunset in 2026, and when it does, most of the population that pays income taxes will see an increase in their federal income tax liability. Although, there is no guarantee that it won't be changed before the sunset takes effect. It could either be better or worse. Given the trillions of tax dollars printed through COVID-19 quantitative easing relief, I believe that tax rates will rise as Congress looks for a way to pay off the debt.
Give yourself a Christmas present.
Income phase-outs happen, and there is no replay. Buying everyone presents for Christmas and not fully funding your plan comes with consequences. If you don't fund your Roth IRA when eligible, you don't get a second chance; once it is gone, it is gone.
I remember when the Roth IRAs were first offered in 1998, and visiting with a friend of mine, who happened to be a CPA, was of the mindset that they were too good to be true and would not recommend his clients. I'm not saying the law won't change in the future, but I think my friend missed out on this wonderful tax-free growth opportunity. When worrying about the future, I always say, "Let's cross that bridge when we come to it."
Tax planning is the only time of year when you can be a mathematician and a magician. You're trying to make numbers disappear while hoping your deductions magically appear! With some planning, you may be able to pull some amazing presents out of the hat!
May the joys of the holidays bless you and your families for years to come.