Taxes, taxes, and more taxes! And potentially more in 2026 when income tax rates go up for individuals. Want to save potentially thousands of dollars on taxes? Review the list below and check the boxes that currently apply or may apply to you in the future. Then, discuss these opportunities with your qualified tax professional and Covenant Trust Financial Services Representative Covenant Trust Financial Services Representative.
💼 Employment
- Check your withholding. Under-withholding may lead to an unexpected tax bill and penalties.
- Maximize tax deductions by contributing to a 401(k), 403(b), HSA, or IRA.
- Did you lose your job? Consider your 401(k) rollover or conversion to a ROTH IRA.
- If you are changing jobs, check for new benefits that were not available before.
💍 Marriage
- Work with a tax professional to help you choose the correct filing status, jointly or separately.
- Newlyweds, what tax bracket will you be in when you combine incomes? Do you have enough federal and state taxes withheld to cover liabilities?
- If you are considering giving money away to family or friends, you can give up to $36,000 as a couple to another individual without having to file a gift tax return with the IRS.
- If you have a high-deductible health plan, consider contributing to a Health Savings Account (HSA). These accounts offer a triple tax benefit – tax-deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.
- If your HSA plan allows for investing options, consider investing part of your HSA like a retirement account. This allows you to help the account balance to grow over time.
👶 Parenthood
- Are you taking full advantage of tax credits and educational savings accounts to support your child’s future?
- Tax and investment experts can guide you to take advantage of opportunities that allow you to put money aside for your child’s education in tax-advantaged accounts like a 529 or Coverdell Education Savings Account (ESA). Contributions to a 529 plan are not deductible on Federal tax returns, but earnings grow tax-free if used for qualified education expenses. Additionally, some states offer tax deductions or credits for contributions.
- If you are a single parent, don’t lose out on tax benefits by using the wrong filing status.
🏠 Selling a Home
- If you sell your primary residence, you may be able to exclude up to $250,000 (for single filers) or $500,000 (for married couples filing jointly) from the profit from tax if you meet specific requirements.
- A tax professional can help you properly report the sale and keep your taxes down.
- Keep thorough records! This can save you on taxes and is an IRS requirement. You need to keep the original closing statement that indicates the purchase price and method of payment. Also be sure to retain receipts from any home improvements you have made since you owned the home and the closing statement after selling the home. If selling an investment property, you might consider a 1031 exchange, which allows you to defer capital gains taxes by reinvesting the proceeds from the sale into another property, provided you follow specific rules and timelines.
📑Divorce
- Divorce can create a whole new tax situation. Consider how you will file your taxes, new tax rates, and the effect on tax liabilities and credits.
- Filing status and how dependents are handled on tax returns can significantly impact your tax bill. For example, only one parent can claim child-related tax benefits like the Child Tax Credit.
- Tax planning before the divorce is final can benefit both parents.
- Knowledge about what is taxable and what is not taxable is critical for proper planning and reporting. Did you know child support is not taxable, and the tax treatment of alimony changed in 2018?
🕊️Bereavement
- The death of a spouse brings significant emotional and financial changes. It also brings important tax implications, such as a probable change in filing status.
- Will you need an estate/trust tax return? Consulting with a tax professional can help ensure these are completed accurately and to your benefit.
- Knowledge of cost basis (the original purchase price) for inherited assets can potentially reduce capital gains taxes if you sell those assets.
- The executor of an estate should work closely with a tax professional to be aware of potential tax liabilities. There may be Federal taxes that need to be handled. Some states impose inheritance taxes. Knowing which states require filing, and their unique limits, exemptions, and rates can significantly affect the estate and its beneficiaries.
🎉Retirement
- Planning includes understanding how withdrawals from retirement accounts are taxed and how to manage withdrawals to minimize taxes.
- A complete retirement plan will not only save money in taxes but can also reduce Medicare premiums.
- Consider the tax implications of your estate plan, including how your assets will be taxed upon transfer to your heirs. Strategies such as Roth IRA conversions or setting up trusts may offer tax benefits.
- For some taxpayers, taking out money before the Required Minimum Distribution (RMD) is advisable, depending on income and taxpayer circumstances.
- Failing to take the Required Minimum Distributions can result in hefty but avoidable penalties.
- Did you know there is a better way to donate to your favorite charity than just writing a check? Those over 70 ½ can do it from their IRAs, saving them significant money and satisfying their RMD.
- The Secure Act has ramifications for some beneficiaries to have 100% of IRA funds out of the IRA within ten years of the taxpayers’ passing.
These can be opportunities to save on taxes and make the wisest investment moves. But you should never make these kinds of important decisions alone. Be sure to discuss any of these situations with your qualified tax preparer and a Covenant Trust Financial Services Representative.
About the authors: Linda Kanter, AA, BSC, MA, EA, has earned the privilege of representing taxpayers before the Internal Revenue Service. She is a consultant for Covenant Trust the President and Owner of Kanter Tax and Trust Consulting, Inc. located in Naperville, IL. Linda has been featured in several articles written by Andrew Leckey and published in numerous online newspapers, including Richmond Times-Dispatch, Tribune Media Services, TwinCities.com Pioneer Press, Contractors Equipment Directory, and Idaho Business Review.