Many accountants are talking to their clients right now about year-end tax planning. Yet, the key to true tax strategy success is year-round tax planning.
The more proactive you are, the better you can control your tax liability and retain more of your hard-earned income. Here are five steps that can help you close the year strong and build a solid foundation for year-round tax planning.
Map Out Your Plan For 2024
Every great business plans for the next year well before the current year closes. Your wealth and tax strategies should work the same way. As you work to forecast the year, ask yourself the following questions:
- What are your wealth goals for the year? What are your longer-term goals?
- How will your income change, either in terms of the amount or sources?
- What expenses do you expect? How are you reviewing and documenting those to identify potential tax deductions?
- What major transactions do you expect? Are there significant assets you plan to buy or sell?
- Are you starting a new business or another entity?
- Do you plan a change in your marital status? Are you planning to have or adopt a child?
- Where would you like to invest?
Work closely with your tax advisor to review these scenarios and how they will impact your taxes. There may be actions you can take before the end of 2023 to minimize your liability.
Consider Bonus Depreciation
If you are planning any major equipment or vehicle purchases for your business, doing so before the end of 2023 could yield significant tax savings. Check with your tax advisor to see if those purchases qualify for bonus depreciation—a tax deduction that allows businesses to immediately deduct a large percentage of the purchase price of certain assets, such as machinery, equipment and, vehicles.
Why the rush? From 2018 to 2022, the Tax Cuts and Jobs Act set bonus depreciation at 100%, which meant businesses could immediately deduct the total cost of qualifying purchases. It is now starting to phase out. For 2023, bonus depreciation is 80%. It drops to 60% in 2024 and falls another 20 percentage points yearly before phasing out entirely by 2027.
Consider Investments That Benefit Both Your Wealth and Tax Strategies
Investors have some options for choosing how they'd like to build wealth. Why not consider those that also come with tax incentives? I've researched the tax laws in 15 countries and found seven investment categories that broadly receive incentives:
- Business
- Technology, research and development
- Real estate
- Energy
- Agriculture
- Insurance
- Retirement savings
Consider a category that fits your plan best and work with your advisors to learn more about what is available. There are lots of great options. One that many investors may want to review if they haven't already is adding solar power systems to their real estate investments. Significant tax credits and other business deductions — including bonus depreciation — are still available, so acting sooner may help.
Evaluate Opportunity Zones
If you have capital gains on selling a business or other asset as part of your plan, investing those gains in an Opportunity Zone can help defer and reduce taxes even if you are investing in a different asset class. Like accelerated bonus depreciation, Opportunity Zones are another product of the 2017 Tax Cuts and Jobs Act. State authorities designate census tracts as Opportunity Zones, typically choosing low-income communities where they would like to encourage investment.
Do your homework to find zones that offer strong investment potential. The tax breaks are significant, but they should not drive your decision. As with any investment, the underlying fundamentals must make sense. Work with your tax advisor to time these investments strategically.
Review Your Estate Plan
Take some time before the end of 2023 to review your will, trusts, insurance, beneficiary designations and powers of attorney. Have you had any changes in your family or assets this past year that warrant updates? As part of this process, you also want to review your plans for making gifts before you die. For 2023, you can gift up to $17,000 per individual (or $34,000 per married couple) without filing a gift tax return.
As you build wealth, your estate planning will become more complex. As it does, having a team of advisors — an estate planning expert, CPA, lawyer and insurance specialist — who work together helps immensely.
But don't stop with a quick year-end check of your estate plan. With an election on the horizon, everyone could benefit from an in-depth review of their estate plan in 2024 to ensure they're ready for any potential changes to tax policies.
The best way to plan with this in mind is to start considering a tax strategy now. If you wait until the last minute you may run the risk of not being able to find an estate planning attorney who can complete your legal documents in time. So, go ahead and get your plan ready.
Maximizing Tax Savings With Year-Round Planning
Many people think about taxes as the end of the year approaches. They scramble to implement last-minute strategies to reduce their tax bill before Dec. 31. Instead, use this time to close the year strong and get ahead on a plan for 2024.
During challenging times, thoughtful year-round planning can help build tax-free wealth. The key is maximizing your choices while remaining focused on potential investment opportunities.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Uncommon Knowledge
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
Newsweek is committed to challenging conventional wisdom and finding connections in the search for common ground.
