Create a Better Future With Long-Term Tax Planning
Rather than thinking about taxes solely on a yearly basis, you may want to consider long-term tax planning. A long view of your tax strategy enables you to make smart decisions today that will affect how much money you have available to you and your family well into the future.
How to think about your tax bracket
The tax bracket you're in this year may not be the same one you're in next year or in the years to come. You want to think about that now, especially if you're on an upward career trajectory or expect your income to increase substantially in the near- to mid-term future.
Why does this matter? Your tax bracket determines your income tax rate—and the more money you earn, the more you're likely to owe. However, you can minimize your tax exposure by projecting your future income and working with a tax planner to determine how best to prepare for that jump in earnings.
Anticipating your future tax bracket also matters when thinking about retirement. A tax planner can help you assess how your income may change when you stop working and how much you'll have in cash, investments and assets. These all factor into how you'll contribute to retirement funds, whether on a pre- or after-tax basis.
Standard deductions and itemizing aren't the same
Another important distinction is the one between taking the standard deduction and itemizing your tax deductions. The standard deduction is a flat number based on whether you file as married, individual or head of household. If you don't have many expenses to itemize, the standard deduction is a straightforward way to reduce your taxable income.
Itemizing becomes important when you have many deductions, such as high medical bills, interest paid on eligible debts, mortgage interest, substantial losses and charitable donations. You'll likely want to itemize if the deductions for which you're eligible total more than the standard deduction.
It's important to think about potential deductions in your long-term tax planning, especially if you're considering buying a home or becoming involved in philanthropy. Those costs and gifts could create a circumstance in which itemizing makes more sense, even though it requires more paperwork.
The difference between tax credits and deductions
Both of these terms are used frequently in tax planning discussions, but they're not interchangeable. A tax credit reduces the total amount of taxes you owe by whatever amount the credit represents. Deductions, on the other hand, refer to reductions in your taxable income. A tax credit and a tax deduction both limit what you owe, but in distinct ways.
What you need to know about tax shelters
Tax shelters can be used strategically to reduce your tax burden by channeling your money into tax-advantaged instruments and investments. These include:
- Retirement accounts
- Health savings accounts
- Capital gains strategy
- Municipal bonds
- Real estate
- Business ownership
- Maximized employee benefits offered at your job
- College savings plans
- Startup investments
A tax planner will be able to advise you on which of these apply to your circumstances and which provide you the most benefit. But they're all common options that people use to reduce the amount of taxes they owe. Whether through deductions or credits, legal tax shelters enable you to hold onto more of your money so you can invest in your family's future and in causes that are important to you.
Tax planning is always evolving
Tax planning is an ongoing process, which is why you want to find a tax advisor you trust. As your income increases and your assets expand, your advisor will help you identify the right tax shelters, determine whether you should itemize and guide you in building a strong tax strategy.
A few financial insights for your life
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.