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Don’t Leave the IRS a Tip: The Importance of Tax Planning and Reviewing Your Return Thumbnail

Don’t Leave the IRS a Tip: The Importance of Tax Planning and Reviewing Your Return

By Bryan Lee, CFP®, MBA

You don’t give your money away for nothing. But that’s exactly what you do when you don’t take advantage of opportunities to minimize your taxes. One of the best ways to retain more of your wealth is to reduce the burden of taxation. And this isn’t something to deal with just once a year when tax day comes; ongoing tax planning can help you strategically reduce your tax bill so the IRS doesn’t get more of your money than they should. 

If you understand the rules of the game, you will have a much higher success rate at winning. The same is true for understanding tax law. If you understand tax law and the benefits available to taxpayers, then when it comes to “winning the game” of reducing your tax bill, you will be that much better off. Here’s how to make that happen.

Create a Tax-Efficient Retirement Plan

When working with your advisor to create your financial plan, retirement planning will often be a key point of conversation. By stress-testing your plan, you can quickly see if your current retirement accounts, savings rates, and other assets will be adequate for the retirement lifestyle you desire.A direct way to reduce your tax bill now is to contribute money into tax-deferred savings accounts, such as a pre-tax 401(k) or traditional IRA – just remember that those contributions plus all of the growth will be taxed as ordinary income when you withdraw funds in retirement (unless donated directly to charity - more on that later). Roth 401(k) and Roth IRA contributions allow the growth to be tax-free, but you don’t get a deduction for the amount contributed. In order to maximize your savings, you need to determine both your current cash flow needs and your ideal retirement income. A financial plan will look at both factors and determine the best way to use your tax-deferred savings accounts to save you money both now and in the future. For example, a $50,000 withdrawal from a Roth IRA will have a wildly different tax impact than that same distribution from a traditional IRA. Creating a tax plan can help you strategically withdraw from your various retirement accounts and reduce your tax liability. 

Contribute to a Health Savings Account

As a refresher, health savings accounts (HSAs) offer triple-tax savings if you are enrolled in a high deductible health plan. It may sound too good to be true, but money contributed to HSAs is not taxed at the federal, state (although some states have special rules), or local levels, and you pay no Federal Insurance Contribution Act (FICA) taxes (which includes Social Security and Medicare taxes) on HSA contributions made via payroll deduction. If you are eligible for an HSA, your money will be tax-deferred and can be withdrawn tax-free to pay for medical expenses either in the year those expenses are incurred or in the future (assuming you keep those receipts and records until the distribution is made). 

Because HSA account balances don’t have to be depleted each year like an FSA, you can build up quite a nest egg with your annual maximum contributions to cover either current medical expenses or future medical expenses in retirement. Think of it as a Roth IRA for medical expenses, with the added bonus of being able to deduct the contributions from your income (something you don’t get with contributions to a Roth IRA). For 2022, HSA owners now have higher contribution limits to help them do just that. If you have individual coverage, you can contribute $3,650, and for family coverage, your limit is $7,300, with an extra catch-up contribution of $1,000 available for those over age 55. (1) If you can’t max out the yearly limit, attempt to contribute enough to cover your deductible and take advantage of your employer match, if available. 

Use a Roth IRA to Transfer Wealth

Roth IRAs are an attractive savings vehicle for many reasons, including no required minimum distributions (RMDs) for the account owner, tax-free withdrawals after age 59½, and the ability to pass wealth tax-free to your heirs (albeit most non-spouse beneficiaries would have to withdraw those Inherited Roth IRA funds within 10 years according to the SECURE Act, which passed in 2019).

You may know the effects taxation can have on your assets and the inheritance you hope to pass on to future generations. For example, if you passed down a traditional IRA, non-spouse beneficiaries used to be able to stretch out the distributions from that account over the beneficiary’s life, but now they have to liquidate the account within 10 years of inheriting it (with some exceptions). Without proper multi-year tax planning, this could significantly decrease the value of the account due to the amount of taxes paid in a short time. 

If you have traditional IRAs already or earn too much to qualify for Roth IRA contributions, consider a Roth conversion to mitigate the tax consequences of RMDs for you and your heirs. The conversion is done by transferring funds from a Traditional IRA to a Roth IRA in your name. The conversion amount will be included as income on your tax return in the year of conversion, and ideally, you would want to have funds outside of your retirement account to pay the taxes associated with the conversion. Be sure to work with a professional to determine the best time to do this so you don’t push yourself into a higher tax bracket or be forced to use funds from the account to pay the extra taxes on the distribution as that would reduce the amount you could otherwise convert and stay in the same tax bracket. Also, stay on top of potential tax changes that could limit the availability of this option for you. (2)

Deduct Eligible Charitable Contributions

Annual gifts to qualified charitable organizations may be deemed an eligible itemized deduction. Under the Tax Cuts and Jobs Act, fewer taxpayers itemize deductions due to the doubling of the standard deduction. (3) Regardless, charitable giving is still a useful tax-minimization strategy.

In order to benefit from charitable giving, you’ll have to plan ahead. With the new higher standard deduction, you’ll need to make sure your total itemized deductions for 2021, giving included, exceeded $12,550 for an individual filer, and $25,100 for married filing jointly ($12,950 and $25,900, respectively, for 2022). (4) If your deductions fall below this amount, consider bunching your giving (that is, doing several years’ worth of giving in one year).

You may also want to look into using a donor-advised fund to combine all charitable contributions in a year and then distribute the funds to various charities over several years. With this strategy, you may be able to itemize deductions in one year and take the standard deduction in the following years so you can achieve a tax benefit that you may not have received otherwise.

Finally, once you turn 70 ½, you can make donations directly to charities from your Traditional IRA, a transaction known as a Qualified Charitable Deduction (QCD). Under current law, each person can donate up to $100,000 per year from their IRA to various 501(c)(3) organizations once they turn 70 ½. Normally, distributions from your IRA are subject to taxation at your marginal tax rate, but QCDs are excluded from your income, which reduces your AGI and could help in reducing Medicare premiums and the amount of your Social Security income that is taxed. Additionally, these QCD amounts satisfy RMD requirements, which currently begin at age 72.

Review Your Previous Tax Returns

You can learn a lot from the past. Look at your previous tax returns with a professional to search for deductions or credits you may have missed, opportunities to lower taxable income, and plan for the next tax season. Take these factors into consideration when making a tax plan for the future: 

  • Review notable tax law changes for 2021 that may affect you.
  • Review your capital gains and losses.
  • Review your retirement savings options.
  • Consider Roth IRA conversions.
  • Consider additional year-end tax strategies.
  • Understand potential tax law proposals.

Getting Ahead With Tax Planning

Tax planning could potentially save you money, both today and in the future, but while this type of planning is beneficial, taxes can be complicated—it’s estimated that it would take the average adult eight weeks of nonstop reading to get through the lengthy and complicated IRS tax code, which is filled with various opportunities and strategies for optimal tax efficiency. (5) The key is partnering with an experienced professional who can help you understand how each possible opportunity works and how it fits into your strategy and long-term goals. 

With years of experience in financial and tax planning, the Strategic Financial Planning team knows how to implement appropriate tax-minimization strategies to help you keep more of your hard-earned money. If you have questions about any of these tax strategies and whether they’d be right for you, we encourage you to reach out to us. Call (972) 403-1234 or contact us online to set up a complimentary get-acquainted meeting so we can see if we are a good fit! 

About Bryan

Bryan Lee is the founder and president of Strategic Financial Planning, Inc., an independent, fee-only financial advisory firm. With more than 27 years of industry experience, Bryan uses a unique client-first financial life planning approach and process to help his clients get the most out of life. Bryan earned his Bachelor of Business Administration in finance and his MBA in international finance from the University of North Texas. He is also a CERTIFIED FINANCIAL PLANNER™ professional. 

Bryan is actively involved in his community and industry and has served on the boards of several associations and charities, including the Dallas/Fort Worth chapter of the Financial Planning Association, the National Association of Personal Financial Advisors, Family Services of Plano, the CITY House, and the Journal of Financial Planning. Bryan has been featured in local and national media, including The Wall Street Journal, Investors Business Daily, CNNfn, USA Today, SmartMoney, Kiplinger’s Personal Finance, Financial Planning Magazine, The Dallas Morning News, and Dow Jones Newswires. And, he has been recognized as a Five Star Wealth Manager and one of Dallas’s Best Financial Planners in D Magazine every year since its inception and recently as a Top Wealth Manager. To learn more about Bryan, connect with him on LinkedIn.


(1) https://www.irs.gov/pub/irs-drop/rp-21-25.pdf

(2) https://www.cnbc.com/2021/11/19/house-passes-build-back-better-act-retirement-plans-for-the-wealthy.html

(3) https://www.cnbc.com/2019/06/18/post-tax-reform-charitable-contributions-took-a-hit-in-2018.html

(4) https://www.forbes.com/advisor/taxes/standard-deduction-2021-2022/

(5) https://irisreading.com/how-long-would-it-take-to-read-the-entire-u-s-tax-code/