With the 2025 tax deadline approaching tomorrow, we wanted to highlight some common ways individuals end up paying more in taxes than necessary. We recommend reviewing your tax situation each year with your financial advisor and a trusted tax professional to ensure you’re taking full advantage of available tax planning strategies.
- Selling investments too soon. Investments that have increased in value and are held for one year or less are subject to short-term capital gains, which are taxed at ordinary income tax rates. In contrast, assets held for more than one year may qualify for long-term capital gains treatment, which is typically taxed at a lower, preferential rate compared to ordinary income.
- Using tax favored accounts to your advantage. Employer-sponsored retirement plans often offer both pre-tax and Roth contribution options. Pre-tax contributions generally reduce your taxable income in the year they are made, but both contributions and earnings are taxed upon withdrawal. Roth contributions do not reduce your current taxable income; however, qualified withdrawals, including earnings, are tax-free. Choosing the right contribution type can help minimize the total taxes you pay over your lifetime.
- Overlooking municipal bonds. Interest earned on municipal bonds is exempt from federal income tax and in many cases state income taxes as well. This gives high income earners an opportunity to receive a stream of tax-free income.
- Unplanned gains in mutual funds. Holding mutual funds in a non-retirement account can produce additional capital gains due to trading that happens within the fund. Using exchange traded funds (ETF’s) in these accounts may give investors greater control over when capital gains and losses are realized, while offering a similar level of diversification as a mutual fund.
- Missing coordination between professionals. Having a financial professional and a qualified tax preparer work together helps ensure you don’t pay more in taxes than necessary over your lifetime. Their coordination can also simplify the filing process and make implementing tax strategies more efficient
Everyone’s situation is unique, so some of these strategies may be appropriate for certain individuals and not for others. We regularly help clients navigate these decisions, so if you have any questions, please do not hesitate to reach out.