Tax Planning for 2026
How to Make the Most Out of Tax Season
Tax season can be a stressful time for anyone. It can feel as though it’s uncontrollable, but there are ways you can plan ahead. Effective tax planning can significantly reduce your tax liability, both now and in the future. Continue reading to learn careful tax planning strategies that can lead to substantial savings.
Retirement Account Contributions
There are two different types of taxable retirement accounts that you can slowly fund as you earn money.
Contributions to a tax-deferred retirement account, like a traditional 401(k), lower the amount of taxes you owe now. Instead, you’ll owe taxes on those accounts when you withdraw funds during retirement. Hopefully, you’ll be paying taxes at a lower rate when you retire, but there is a chance you’ll be in a high tax bracket when you retire, so this can be a bit of a gamble. Even if you do end up in a higher tax bracket when you retire, you could still come out ahead thanks to gains from compound interest.
If you opt for an after-tax account, like a Roth 401(k), as a retirement savings vehicle, you’ll pay taxes on the money now, but your withdrawals will be completely free of federal income tax. This is assuming you’re at least 59 ½ years old when you begin making withdrawals, and you’ve had the account open for at least five years. Tax planning should include a careful analysis of both options.
Educational Savings Accounts: Smart Tax Planning for Education
If you have dependents, tax-deferred savings plans like 529 plans or Coverdell Education Savings Accounts (ESA) are a way to save money for their college education while lowering your taxes over the long-term. Contributions to 529 and ESA plans are made with after-tax dollars, but withdrawals (including earnings from interest) are not subject to federal income tax – and in some cases, you won’t pay state income taxes on them either. This is a critical component of family-focused tax planning.
Keep in mind that 529 and ESA funds must be used for qualified secondary education expenses, as outlined by your plan administrator. Otherwise you’ll be hit with extra taxes and penalties. You can, however, roll over funds from a 529 account into a Roth IRA account for the same beneficiary. This is helpful if you have funds left over in the account when your student finishes college. Understanding the details of a 529 savings plan tax deduction is crucial.
Capital Gains and Losses: Planning Taxes for Investments
Minimizing taxes isn’t the most important part of your investment strategy, but it should be part of your tax planning strategy. After all, it can have a big impact on your gains. Here are some terms you should know:
Capital gains – Money earned by selling an investment for more than you paid for it.
Capital loss – money lost by selling an investment for less than you paid for it.
Long-term capital gain or loss – money earned for lost after owning an investment for more than a year. Long-term gains are taxed at a lower rate than ordinary income. The long-term rate is based on your adjusted gross income, or AGI, and could be anywhere from 0-20%. You could face additional surcharges based on your AGI.
Short-term capital gains or loss – money earned or lost after owning an investment for less than a year. Short-term gains are taxed as ordinary income.
Offset losses or gains – long-term capital losses can offset long-term capital gains, and short-term losses can offset short-term gains, dollar-for-dollar. Unused losses can also be carried forward from one tax year to the next. These losses have no time limit, so you can carry over losses until they are exhausted.
With this information in mind, it may make sense to hold on to some investments long enough that they can be taxed as long-term capital gains. Or, if you’re going to sell at a loss, doing so before the end of the tax year can offset other gains.
Avoid the Wash Sale Rule
Be careful when claiming investments as a loss. The IRS prohibits taxpayers from taking a loss on investments ant then replacing them with the same or similar investment within the same 30-day period before or after a sale. This rule includes the day you sell your investment, so it actually ends up being 61 full days that you cannot buy an investment that is the same or similar, according to the IRS. If your transaction is deemed a wash sale, you won’t be able to claim any of the losses.
Health Care Costs and Tax Planning
Set aside money for health care without pretax income using a flexible spending account (FSA), if your employer offers one. You cannot use the money to pay for premiums, but you can use it for copays, deductibles, prescription drugs, and even over-the-counter medications that qualify. If you’re wondering if you should put pre-tax income for ACA plans, consult with a tax professional.
FSAs do come with one risk, though - if you don’t use the money during the calendar year, you may forfeit it. Employers can offer a two-and-a-half-month grace period into the next year, so you can still spend the funds during that time. Or they may offer a rollover of unused funds.
Charitable Donations and Tax Strategies
You can deduct gifts to qualified charitable, religious, or educational organizations in different ways. These gifts can be cash donations, stocks and securities, personal property and inventory, real estate, and more. If you want to make gifts to family members, like children and grandchildren, consult a professional about the best ways to make those gifts to minimize the tax impacts to you and them.
Managing Your Federal Tax Payment Plan
If you find yourself unable to pay your taxes on time, exploring a federal tax payment plan with the IRS is a crucial step in responsible tax planning. This can help you avoid more severe penalties and interest accruals.
The Benefits of Tax Planning Software
Using tax planning software can greatly simplify the process of managing your taxes and identifying potential deductions and credits. These tools can help you stay organized and ensure you’re taking advantage of all available tax benefits.
Plus, as a credit union member, you can receive special benefits and discounts! For more information, visit I Love My Credit Union
Disclaimer While we hope you find this content useful, it is only intended to serve as a starting point. Your next step is to speak with a qualified, licensed professional who can provide advice tailored to your individual circumstances. Nothing in this article, nor in any associated resources, should be construed as financial or legal advice. Furthermore, while we have made good faith efforts to ensure that the information presented was correct as of the date the content was prepared, we are unable to guarantee that it remains accurate today.