Three Simple Strategies to Reduce Tax-Time Stress
Jared Nickoli and Ben Beshear
Photo provided by Northwestern Mutual Associate Wealth Management Advisor in Cincinnati Ben Beshear
As many of us know too well, there is no way to escape filing your taxes. It can be a stressful time.
As financial advisors and professionals at Northwestern Mutual, my colleagues and I work closely with our clients and their tax professionals to strategize and navigate tax season. And over the years, we have noticed our happiest clients take these three simple strategies to help relieve the stress.
1. 12 Month Tax Season:
For those who delay filing taxes until the April deadline, or file for an extension, there can be many last-minute money decisions or missed opportunities to help reduce their tax burden. While it feels great to kick the can down the road a bit longer, the tax monkey (with an IRS shirt on) is always on their back with its hand out.
A better strategy might be to manage your tax planning throughout the year. At the beginning of the year, try to get an estimate of where your income from all sources might be for the entire year. Review the updated tax brackets, laws and changes to get an idea of where you might fall. Reference your previous year’s tax return and look for opportunities to lower your tax exposure. Use this information to put together a game plan and review it periodically (at the time of this writing, a new tax bill is currently being voted on by the Senate). You should work with a trusted tax expert or tax software to create your game plan.
A common strategy we see many tax professionals recommend is increased contributions into tax-advantaged savings vehicles (401k’s, IRA’s, etc.). These vehicles can reduce taxable income. If contributions are delayed until year-end, it can be hard to produce the lump sum needed. Creating a monthly savings plan in January may make this strategy easier on cash flow.
2. Leverage Free and Professional Services:
The Federal Tax Code is made up of more than 74,000 pages—overwhelming to say the least. Luckily, there are many resources you can use in lieu of spending a few months brushing up on the tax code. A great place to start is www.irs.gov. The IRS’s official website is a great spot to check for recent tax law changes, information on filing, fact sheets and contact information, should you have questions.
If you use tax software, most of the major programs offer free help from a tax professional via phone, chat, email or even face-to-face.
If you use a Certified Public Accountant or other tax professionals, which can be a wise move, it’s worth asking them to help construct a game plan and monitor your tax status throughout the year. You can also connect your tax professionals with other financial professionals. This coordination allows your professional team of advisors to be on the same page—no surprises at the end of the year.
3. Plan for the Future:
Reducing your current year tax burden is important to most of us. However, many overlook how current savings and tax strategies may affect taxes in later years. Many tax-advantage savings strategies can help one’s immediate tax situation, but can create income tax in the future (sometimes required based on age). A good example of this is a 401k or IRA. Generally, you must begin taking withdrawals when you reach age 70 ½. The IRS provides a Uniform Lifetime Table which details the minimum amount you must distribute from the account. Given distributions are taxed as ordinary income, which can significantly limit the flexibility of your tax planning.
Article prepared by Financial Advisor Jared Nickoli with the cooperation of Northwestern Mutual. Nickoli is an insurance agent of Northwestern Mutual based in Cincinnati. Email Jared at firstname.lastname@example.org. Northwestern Mutual is the marketing name for The Northwestern Mutual Life Insurance Company (NM), Milwaukee, Wisconsin, and its subsidiaries. Jared Nickoli is a Representative of Northwestern Mutual Wealth Management Company® (NMWMC), Milwaukee, WI (fiduciary and fee-based financial planning services), a subsidiary of NM and federal savings bank.
Northwestern Mutual and its advisors do not offer tax advice.