Let's admit it: Planning for taxes is not the most fun activity. There are likely (many) other things you would rather be doing. But accurate tax planning is important for your overall financial health. Planning early for taxes can help you save money, make fewer mistakes, and stress less when tax season arrives.
Let's consider why you should plan your taxes two years at a time.
The Benefits of Planning Ahead
When it comes to tax planning, it's natural to want to procrastinate and put it off until the last minute. But a two-year tax plan is a smart plan. Approaching your taxes two years at a time allows you to look ahead and implement strategies to maximize benefits and lower your tax liability.
Here are some of the benefits of planning your taxes two years at a time:
Early Organization Means Fewer Errors
Any errors on your tax returns are going to delay the process even further, so planning ahead allows you to gather all your documents and avoid potential errors before your taxes are due.
Eliminate Deadline Stress
Taking the time to get important tax documents in order reduces procrastination and eliminates tax deadline stress.
Take Advantage of All Applicable Tax Deductions & Credits
Early planning will ensure that you are claiming all the tax deductions and credits available to you. You can assess where you stand by reviewing your current and projected income levels and making any changes as you calculate your taxes correctly. You can also use the Tax Withholding Estimator on the IRS website to estimate the federal income tax you want your employer to withhold from your paycheck as you think ahead.1
Have Time to Review Tax Law Changes
Tax laws change frequently, so by planning for two years at a time, you can review these laws and know when they go into effect to be proactive in your planning.
Develop a Payment Plan Strategy
By planning ahead, you can project any tax liability ahead of time and develop a payment plan strategy, if needed. If you are self-employed or receive income from your investments, you will have time to calculate your quarterly taxes and build those expenses into your budget.
Be Strategic With Your Investments
With a two-year plan, you can also reallocate your investments to be as tax efficient as possible. For example, you may want to consider any capital gains and plan to pay taxes on those gains when it's more advantageous for you. It's important to estimate your tax burden before you sell any major asset, such as your home, business, or appreciated stocks.
Plan for Major Life Changes
Planning ahead allows you to adjust to major life changes, such as selling a home, getting married or divorced, retiring, or moving to a different state with different tax requirements.
Plan Your Retirement Contributions
Just like planning for your investment allocations, you can also plan out your retirement contributions to be tax efficient (and to ensure that your plan is funded).
Time Your Charitable Giving
Charitable giving is another way you can use proactive tax planning to your advantage. Use charitable donations as a way to reduce your tax liability by planning ahead.
Find Tax Help
Lastly, planning ahead gives you time to find and work with a trusted professional, if needed, to coordinate tax and financial planning.
Planning out your taxes two years in advance allows you to be strategic about your tax savings and prepare for any tax changes coming your way. When you plan early, you can limit the stress and anxiety that come with last-minute tax planning. No one wants to be gathering important tax documents days before the filing date! Being proactive and looking at your short-term and long-term financial picture will help you approach tax planning more efficiently.