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Tax planning important part of financial health

3 min read

3 min read

May 04, 2016

H&R Block

Any financial strategy that does not include tax planning is missing part of the larger picture. While taxpayers should not make financial decisions for tax purposes alone, they should consider the implications certain decisions and actions will mean for their taxes and even consider a few options to reduce their tax liability.

Extend planning horizon

A financial decision that results in a tax benefit in 2016 may have unexpected consequences in 2017. For example, a taxpayer might increase charitable contributions in 2016 to get a tax benefit, but decrease charitable contributions in 2017. That might not be the best move if the taxpayer expects to see their taxes stay the same or increase in 2017; for example, perhaps the taxpayer expects to lose a dependent and see their tax liability increase. The timing of buying and selling stocks could similarly affect a taxpayer across multiple years, so taxpayers should look beyond the current year to take into account the full tax impact.

Offset capital gains with capital losses

Taxpayers with a large net capital gain could reduce their tax liability by selling securities that generate a loss. The loss would offset their gain to reduce their tax liability. Taxpayers in this situation should consult with their investment advisor to look at the larger financial picture, and with their tax professional to learn how a sale would impact their tax liability for that year.

Increase basis with home improvements

The tax code excludes the first $250,000 of gain from selling a house from tax if the homeowner meets the ownership and use requirements. For married taxpayers filing jointly, the exclusion increases to $500,000 if the requirements are met. Upgrades to the house – such as installing new heating and cooling, upgrading a roof or windows, renovating a kitchen or adding a room – add to the basis in the house. Keeping track of additions that add to basis is especially helpful for those who do not qualify for a full exclusion.

Repair and maintenance costs necessary to keep the home in good condition, such as painting the home, do not count as upgrades that increase a homeowner’s basis. To qualify, an upgrade must add value to the home, prolong its useful life or adapt it to new uses.

Considering future tax implications will enable taxpayers to make better decisions based on a bigger financial picture across multiple years. Just as they may consult an investment advisor for help understanding their investment options, they may also choose to work with a tax professional for help completing the financial and tax picture.

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