what is tax planning 
tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible a plan that minimizes how much you pay in taxes is referred to as tax efficient tax planning should be an essential part of an individual investor s financial plan reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success understanding tax planningtax planning covers several considerations considerations include timing of income size and timing of purchases and planning for other expenditures also the selection of investments and types of retirement plans must complement the tax filing status and deductions to create the best possible outcome retirement saving strategiessaving via a retirement plan is a popular way to efficiently reduce taxes contributing money to a traditional ira can minimize gross income by the amount contributed for 2023 if meeting all qualifications a filer under age 50 can contribute a maximum of 6 500 to their ira with an additional catch up contribution of 1 000 if age 50 or older that number rises to 7 000 in 2024 with the catch up contribution holding steady at 1 000 if an individual who made 75 000 a year contributed a total of 7 000 to a traditional ira in 2024 they would have an adjusted gross income of 68 000 75 000 7 000 on which they would be taxed the 7 000 would then grow tax deferred until withdrawn there are several other retirement plans that an individual may use to help reduce tax liability 401 k plans are popular with larger companies that have many employees participants in the plan can defer income from their paycheck directly into the company s 401 k plan the greatest difference is that the contribution limit dollar amount is much higher than that of an ira in 2023 the contribution limit for a 401 k is 22 500 increasing to 23 000 in 2024 for both years if you are 50 and over you can contribute an additional 7 500 if we take the example above if an individual contributed 23 000 in 2024 their adjusted gross income would be 52 000 75 000 23 000 on which they would be taxed the 23 000 would grow tax deferred until withdrawn tax planning vs tax gain loss harvestingtax gain loss harvesting is another form of tax planning or management relating to investments it is helpful because it can use a portfolio s losses to offset overall capital gains according to the irs short and long term capital losses must first be used to offset capital gains of the same type in other words long term losses offset long term gains before offsetting short term gains short term capital gains or earnings from assets owned for less than one year are taxed at ordinary income rates in 2023 long term capital gain limits are the following in 2024 long term capital gain limits will be increasing to the following for example if a single investor whose income was 100 000 had 10 000 in long term capital gains there would be a tax liability of 1 500 if the same investor sold underperforming investments carrying 10 000 in long term capital losses the losses would offset the gains resulting in a tax liability of 0 if the same losing investment were brought back then a minimum of 30 days would have to pass to avoid incurring a wash sale according to the internal revenue service if your capital losses exceed your capital gains the amount of the excess loss that you can claim to lower your income is the lesser of 3 000 1 500 if married filing separately or your total net loss shown on line 16 of schedule d form 1040 for example if an individual earned 75 000 a year and had 5 000 in net capital losses for the year the 75 000 income will be adjusted to 72 000 72 000 3 000 the remaining 2 000 in capital losses can be carried over with no expiration to offset future capital gains 