Tax planning remains a vital component to your financial success and should be part of your calculations throughout the year, not simply when April rolls around annually. You might want to think about the tax deadline as a “final exam,” and all your preparations are the metaphorical “study program.” We want to earn an “A” not just barely pass the “class.”
Normally, you should have a reasonable estimate for your tax liability, and you shouldn’t be surprised by your tax return results. In a year where you experience substantial changes in your income, you should take the time to contemplate the effects on your household. A major upward shift might mean that you need to make estimated tax payments to avoid underpayment penalties. A significant decline (spouse losing a job) might indicate a change in withholding to mitigate a cash crunch.
If you have the available cash to save, one of the simplest ways to lower your annual taxable income is by contributing to your retirement accounts, such as your 401k, IRA, or others. The contributions made to these accounts often qualify for tax deferrals or immediate tax savings, dependent upon the type of account and contribution chosen. If you choose to contribute pre-tax to a Traditional 401k or IRA, the amount contributed can reduce your taxable income. Note that 401k contributions automatically reduce your income on the W-2 form, but you will need to record any deductible contributions to your IRA. Pre-tax contributions will continue to grow deferred until you withdraw them in retirement.
Another option is Roth contributions. Although this will not reduce your taxable income in the current year, it will allow for tax-free growth and tax-free distributions in retirement. People in low tax brackets (young/part-time) will likely find that tax-free growth and distributions are more beneficial than a small tax break in the year of contribution. An IRA or Roth IRA allows contributions up until April 15th of the following year.
If you think 2025 will bring about a large increase in your income, consider setting aside some funds for estimated tax payments. You may not want to pay taxes immediately in the event the increase doesn’t come to fruition, but you will likely appreciate breaking the payments up if you do owe a large amount. If you are considering retirement during 2025, make certain that you are maximizing your 401k for the year to capture a company match and get the largest possible deduction.
Having a CPA is a great tool to ensure your taxes are getting done correctly. Don’t simply sign your return blindly, review it so you can plan strategically for future returns. Track your progress during the year so that you can try to be more accurate the following year. Although I am not a tax specialist or tax professional, I am more than happy to talk about some strategies that could benefit you now and in the future.
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