April’s Tax Day is behind us. Refunds are likely spent or squirreled away already, or the sting of a tax bill may be fading. For most taxpayers, that means thinking about their tax season outcome is behind them—but that could be a mistake.
According to a Nationwide news release reporting the findings of the 11th annual “Advisor Authority” study from the Nationwide Retirement Institute, failing to think about one’s taxes beyond the annual filing season “could have major implications for the retirement security of millions of Americans.”
While the study found 80% of Americans anticipate facing higher tax rates in the future, it revealed most (69%) aren’t proactively planning to mitigate the impact on their retirement savings. Further, “not knowing the best tax strategies for their portfolio” or “understanding tax implications before retirement withdrawals” are among their top concerns.
To help turn tax planning into a year-round strategy to secure one’s wealth at all stages of life, the Illinois CPA Society suggests taxpayers take these four steps:
- Revisit tax returns: The study found 34% of Americans mostly pay attention to their taxes during tax season, and just 26% engage in “ongoing, proactive tax management all year.” A smart money move to start with is revisiting one’s tax returns. Was a notably larger refund received, or was an unfortunate tax bill due? Was there a significant difference from prior years? If so, why? Ideally, taxpayers should see little to no refund or balance due come Tax Day, so if that wasn’t the case, adjustments should be made.
- Think beyond tax season: How a taxpayer earns income and saves it throughout the year impacts their taxes. Even small adjustments to one’s W-4 payroll withholdings or tax-deferred retirement account contributions—and adjusting whenever a life event occurs (think changes in employment, marital status, children or dependents, inheritance or investment income, etc.)—could be enough to hit that goal of little to no refund or balance due on Tax Day. Depending on how much income tax was refunded or due on Tax Day, and why, will inform a taxpayer of what they can do throughout the year to strategically mitigate or better manage their tax burden.
- Diversify tax exposure: The study found fewer than half (44%) of investors practice “good tax diversification.” Due to the unpredictable nature of future tax rates, taxpayers should maintain their savings and investments in a mix of taxable, tax-deferred, and tax-exempt accounts. Doing so diversifies current and future tax exposure and creates more opportunities for strategic tax planning as one’s financial needs change throughout life.
- Seek guidance: According to the study, most Americans only speak to advisors “when something forces the conversation.” Instead of waiting for a complex tax or other financial situation to arise, taxpayers should think of proactive tax and financial planning as a means to financial flexibility and freedom. Every dollar counts, and having trusted tax and financial planning professionals to turn to are helpful when it comes to decoding the outcome of tax season, mitigating one’s tax exposure, and making the most of one’s income and savings.
As Americans face shifting tax laws, persistent inflation, and other pressures on personal savings rates, year-round tax and financial planning has never been more important.
