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When tax-filing time arrives, people often shake their heads as they look in dismay at how much they owe and wonder what they can do to keep more of their hard-earned savings.
Unfortunately, by the time you’re preparing your taxes to meet the filing deadlines, you owe what you owe, and there’s little you can do about it.
April 15 may be the traditional deadline for filing with the IRS, but December 31 of the previous year is the deadline for taking measures to lower your tax bill.
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That’s the bad news.
The good news is you have plenty of time to start taking steps now to improve your tax situation for next year.
In doing so, you might discover a few surprising opportunities.
One example: As much as people prefer to stay in lower tax brackets when possible, that’s not always the best strategy. Sometimes, it can even hurt you in the long run.
But before we go too much further into that and other tax-efficient strategies, let’s examine the difference between tax planning and tax preparation.
Tax planning vs tax preparation
In a sense, you can sum this up by saying that tax preparation is about the past. Tax planning is about the future.
Tax preparation is what your CPA does: Reviewing your numbers, subtracting the acceptable deductions and telling you what you owe. It doesn’t come with much wiggle room because by the time you file your taxes, you are limited by decisions you made in the previous year or years. Tax preparation is reactive.
This is true even for retirees. Why? Because taxes don’t end in retirement, they become more expensive. If you’re not attentive and deliberate, they can eat away at the money you carefully saved over the decades.
The calendar problem
Sometimes in retirement, people have what you could call a “calendar problem.” What I mean by that is you need to understand the cadence of your income as it relates to each year. If you don’t, you may face trouble down the road.
This is where it may not make sense to stay in a lower tax bracket. Taking advantage of lower brackets must be put in perspective. The question is: Are you taking so much pride in reducing your tax bill now that you miss out on wonderful opportunities to reduce your tax bill even more in years to come?
An example of this would be someone who is 10 years from retirement and has saved a significant amount of money in a traditional IRA. This person is happy to stay in their lower tax bracket but fails to realize right now would be a good tax-planning opportunity, even if the move pushes them into the next tax bracket.
One problem they face (and may not realize) is that when they reach age 73, required minimum distributions (RMDs) will kick in. RMDs force you to withdraw a percentage of your money from tax-deferred accounts, such as traditional IRAs, each year, whether you want to or not. And that money is taxed.
When your heirs inherit an IRA, they pay taxes on distributions, which are added to the beneficiaries’ income. If those beneficiaries are in the highest-earning stages of their lives, they may already be in a high tax bracket. Adding inherited money is likely to set them up for an unexpectedly large tax bill.
One strategy is to assess the value of Roth conversions to avoid these future taxes. With this strategy, you convert money from a traditional IRA into a Roth IRA. When you do that, you pay taxes on the money you convert, and yes, withdrawing it from the traditional IRA could push you into a higher tax bracket in the years you make the conversion.
But the tradeoff is the money then grows tax-free, future withdrawals are not taxed after five years, and there are no RMDs. In addition, your heirs receive the inherited Roth IRA tax-free.
So, this is an instance where you look at the cadence of your income and think: Do I pay the taxes now and be done with it, or do I pay them forever into the future?
Other strategies to consider
A Roth conversion is just one tool in your tax-planning arsenal. A few other options to consider include:
- Tax-loss harvesting. This strategy can be put into play if you have capital gains that will increase your tax bill. You can offset those gains by selling taxable accounts that lost value.
- Qualified charitable distributions (QCDs). A QCD allows you to transfer money from your IRA directly to a charity if you are at least 70½ years old. This transfer does not count as taxable income but can count as your annual required minimum distribution. That makes it a good way to give back to the community while avoiding extra taxes.
- Maximizing gifts. If you plan to leave a legacy to your children or grandchildren, you don’t have to wait until after you are gone. You can begin giving them money now in annual gifts. For 2026, the IRS allows gifts of up to $19,000 annually for each individual. For example, if you had three grandchildren you wanted to give a monetary gift to, you could give each of them $19,000 without incurring a tax. A married couple could give up to $38,000.
These, of course, aren’t all the strategies you might deploy. A financial professional with experience in tax planning can help you review your portfolio with an eye toward reducing your future tax bills.
But tax planning is not a one-time thing. It is an ongoing effort, a strategy that must be built throughout the year — and carried out in the years to come.
Ronnie Blair contributed to this article.
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