Tips for Simplifying Your Tax Life


“The hardest thing in the world to understand is the income tax.”  — Albert Einstein

Taxes are often frustrating, expensive and confusing to even the well-informed and well-educated. And with a word count higher than the Gettysburg Address, Declaration of Independence, and the Bible combined, tax codes can be difficult to navigate.

However, tax planning is an essential part of your overarching financial plan.  When executed well, it can contribute significant savings that you can repurpose to further your progress in achieving long-term financial goals.

In the last 20 years alone, the tax code has changed more than 4,500 times, making it essential to meet to coordinate with your CPA for formal tax guidance and with your wealth advisor to identify potential tax sparing solutions related to your investments.  You’ll want to have these tax-specific check in meetings annually to account for changes in tax laws, personal finances, family status, or a litany of other factors that can impact your tax bill.

For example, there are multiple provisions in President Biden’s proposed tax plan that may impact you, should they become law, including:

  • Higher income taxes for individuals earning $400,000+: Since President Biden’s tax plan has still not gone to Congress, we don’t know whether this limit will apply to single taxpayers or those who are married and filing jointly. Nor do we yet know whether the $400,000 threshold applies to adjusted gross income or taxable income.
  • Reduced tax benefit of future 401(k) and IRA contributions for high earners: Rather than receiving a deduction for 401(k) and IRA contributions, taxpayers could receive an income tax credit that decreases as income increases.
  • Increased capital gains tax rates, especially for those earning $1M+: The President’s plan proposes increasing the maximum rate on ordinary income taxes from 37% to 39.6% and reducing or eliminating the preferential tax rates on capital gains. This could increase to as high as 39.6% for those earning income more than $1,000,0000.
  • Higher Social Security wage base: For 2021, you will pay social security taxes on income earned up to $137,700. The proposed plan increases the wage base for social security to $400,000. However, it’s not yet known whether the Social Security tax rate of 6.2% would also change.
  • Reduced estate tax exemption: Under the current law, the first $11.58M of assets per individual avoid the 40% estate tax, but Biden has proposed reducing this amount per individual by half.

Knowing that one of – if not THE – largest bill your family pays each year could be getting even bigger can feel daunting, but there are steps you can take to potentially mitigate tax burden on your family’s wealth.

To plan for anticipated changes as well as future unknown ones, make sure you have the right process for doing your taxes. Strategizing and organizing are important steps that will allow you to prepare for next year’s potential tax plan and this year’s guaranteed one.

1. Strategize. With the right investment strategy and financial planning, you may be able to lower your taxable income and realize savings. Consider maximizing contributions to your 401(k) contributions, health savings account (HSA) and eligible traditional IRA.

Dependent Care Flexible Spending Accounts (for any income level), “back door” Roth conversions and Deferred Comp (for high income earners) are other examples of ways to reduce your taxable income while managing cash flow both now and in the future.

These examples represent a small subset of the many available to address your tax burden, which is why your wealth advisor plays a critical role in your tax as well as financial planning.

2. Organize. Before you sit down to do your taxes, get your financial documents in order. Doing so in advance will help make this year’s process go more smoothly and, if you set up a system in which you make it easier to file important documents away in the future, you’ll be saving yourself time and frustration well ahead of next year’s tax season. Not sure which documents to keep? Check out our complimentary guide.

Questioning whether your tax strategy is working as hard as it can for your benefit? Schedule a time to speak with CornerCap Wealth Advisors today.

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