Proactive tax planning

The U.S. tax code is vast and complicated. To take advantage of all the tax-savings opportunities available to you, start planning for your income taxes well before the April filing deadline set by the IRS.

Along with your tax professional, your Ameriprise financial advisor can help you understand your options — from tax brackets to withholding strategies — based on your needs and financial goals.

To get started, here’s how to take a proactive approach to tax planning:

1. Understand your tax bracket

The U.S. uses a progressive tax system, which means that the more income you make, the more you typically pay. There are currently seven federal income tax brackets — 10%, 12%, 22%, 24%, 32%, 35% and 37% — and which one you fall in will depend on your filing status and income.

Knowing your tax bracket can help you with various aspects of your finances, including determining how much to withhold from your paycheck or how any changes to your income could affect your taxes moving forward. If you are on the threshold of a higher or lower bracket, certain tax planning strategies can also help you manage your taxable income, so you’re not surprised at tax filing time.

2. Review your withholding amounts

Help lower the chances of a large tax bill or return by making sure you’re not regularly under — or over — withholding for your taxes. Proactively check your pay statements and review how much your employer is withholding from your paychecks. If you consistently receive a large tax refund after filing your taxes, you are likely withholding too much money from your paycheck. On the other hand, if you consistently owe a large amount of money, or pay an under withholding penalty, you’re likely withholding too little.

If your finances are relatively straightforward, you can avoid both scenarios by using the IRS tax withholding estimator, which allows you to see how different numbers could affect your refund, take-home pay or taxes you owe. If you decide to adjust your withholding, know you can submit a new Form W-4, Employee’s Withholding Certificate — the IRS form you give to your employer to indicate how much you want withheld from your paycheck — at any time.¹

3. Reduce your taxable income and liability

There are various ways to reduce your taxable income and tax liability in any given year. The earlier you plan, the more opportunities you will have to potentially save. Consider how proactive tax planning can help you leverage these strategies throughout the year for maximum impact. Here are some common ways to reduce your tax burden in a given year:

• Save pretax dollars in your 401(k) account.
• Maximize deductions and credits.
• Contribute to a health savings account (HSA).
• Utilize tax-loss harvesting.

Learn more: 8 ways to potentially lower your taxes

4. Know if you need to make estimated tax payments

Estimated tax payments are paid to the IRS throughout the year on earnings not subject to federal tax withholding. If you fall into one of the following groups, you may be required to make estimated tax payments:

• You are self-employed or earn significant income from freelancing or side jobs.
• You make substantial income from dividends, realized capital gains, prizes or other non-wage earnings.

A tax professional can help you determine if you need to make estimated payments and how much.

5. Determine whether to itemize or take the standard deduction

When you file a federal income tax return, you choose between claiming the standard deduction or itemizing your deductions. The standard deduction lowers your income by a fixed amount according to your filing status, while itemizing allows you to deduct eligible expenses you incurred during the year. Common expenses you can itemize (subject to certain limitations) include mortgage interest; state and local taxes; property taxes; charitable donations; and medical and dental expenses that exceed 7.5% of your adjusted gross income.

To determine which option may make sense for you, add up eligible deductions you may have for the year and see whether the number exceeds the standard deduction amount. If it does, you should itemize.

If you think that itemizing may work for you in a given tax year, it’s helpful to start strategizing about deductions early so that you can maximize any available to you.

6. Plan ahead for what you may owe the IRS

Failure to pay your taxes by the deadline can result in substantial penalties and interest fees, but being proactive in tax planning can help you avoid these issues. If you suspect you may owe additional taxes to the IRS at filing time, automatically setting aside money on a regular basis for this purpose is one of the simplest ways to help ensure you’re able to pay your tax bill in full and by the deadline. If time allows, you can also adjust your paycheck withholding anytime during the year. 

If you don’t want to use cash or liquidate assets to pay your bill, you could also consider securities-based lending. This allows you to borrow against your portfolio of non-retirement, marketable securities — such as stocks, bonds and mutual funds — for a line of credit, providing liquidity while keeping long-term investments intact.

7. Keep your tax records in a central location

When filing your taxes, much of the work is locating the records you’ll need to reference. As you receive these documents — including receipts, medical bills and property tax documentation — consider organizing them securely in a central location. This will help reduce stress when it’s time to file. Tax statements are also often available online. Set up access, if you don’t already have it, to your mortgage company, HSA and financial institutions to be able to download statements when the time comes.

Learn more: How to keep your financial records organized

8. Get advice from professionals

Taxes can be complicated and time-consuming, and navigating the process on your own makes it more difficult to take advantage of various tax-efficient strategies that help support your unique financial goals.

A financial advisor can help you decide which strategies make the most sense for you, given your situation. In addition, they will coordinate with your other professionals, such as an accountant or tax professional, to ensure everyone is on the same page regarding your tax planning strategies. Finally, your financial advisor and your tax professional can work together throughout the year to identify and leverage tax-saving opportunities to help you stay on track toward your overall financial goals.

Proactive planning can help lessen your tax burden

Whether you’re wondering about your tax bracket, worried about withholding too little or want to lower your taxable income, your Ameriprise advisor can work with your tax professional to create an income tax planning strategy that reflects your needs and financial goals.