By Stephen W. Bedikian, Associate Wealth Advisor
Key Takeaways
- Tax planning, not tax preparation, helps drive the biggest savings. Most taxpayers focus on filing accuracy, but the real cost can come from missed planning opportunities that must be implemented before year-end.
- Maximizing retirement and HSA contributions can help reduce taxable income. Contributing beyond employer matches – and fully utilizing HSAs – can potentially create tax savings and offer long-term compounding benefits.
- Understanding and managing tax brackets can help avoid unnecessary taxes. Strategic income and contribution planning can keep earnings within lower tax brackets and help prevent income from spilling into higher marginal rates.
- Income thresholds can trigger the loss of valuable deductions. Certain deductions phase out at higher income levels, making it critical to plan withdrawals and income timing carefully to avoid unintended tax consequences.
- Ongoing collaboration with an advisor can help improve tax outcomes. Reviewing your return annually with a CPA and financial advisor helps ensure better planning, coordination, and implementation of tax-saving strategies throughout the year.
Why Strategic Tax Planning Reviews Are Important
Every year Americans go through the same very unenjoyable spring ritual – tax prep season. Most people are focused on avoiding mistakes in their tax preparation (and hoping for a refund). Because most filers use tax prep software or a CPA, mistakes are relatively infrequent and the chance of getting audited by the IRS is low. The experts at Nolo estimate that just 0.40% of individual returns filed were audited by the IRS.
The focus on tax preparation mistakes is misguided because the true cost for most taxpayers is in the lost opportunities associated with tax planning, not tax preparation. And unfortunately, if you start thinking about taxes in January, many tax saving opportunities have already been missed because the strategy would need to have been implemented in the year just concluded.
The tax planning opportunities available to a taxpayer vary greatly based on their specific situation as defined by income amounts and types of income; credits and deductions based on age, filing status or other factors; etc. The list of opportunities is long, but they tend to fall into several categories.
1. Missed Retirement and HSA Contributions
For most salaried workers with W2 income, the biggest missed opportunity is no or limited retirement plan and health savings account (HSA) contributions. Many workers make retirement contributions based on the company match, so they don’t miss out on ‘free money’. That’s smart, but it often adds up to a contribution that’s way below the IRS limits.
For example: If your gross salary is $100,000 and the company match is up to 6%, you decide to contribute $6,000 to get the full match. However, the maximum contribution in 2026 is $24,500 so if you are in the 22% tax bracket, you will pay $4,070 in federal taxes on the $18,500 retirement contribution that you could have made but didn’t. You would also have to pay state income taxes on the income unless you live in a state without an income tax like Texas.
In 2026, the maximum contribution to an HSA for a family is $8,750 which is fully deductible. And remember: HSA contributions are triple-tax free because the contribution is deductible and if you take a distribution for a qualified health cost, then that’s also tax free. In the interim, you get tax free compounding. 401k contributions are only tax-deferred because the distributions are taxable, so HSA contributions can be more advantageous.
If you maxed out both your retirement plan and HSA contributions, you would have income of just $66,750 for tax purposes versus $100,000 if you made no contributions. In the 22% federal tax bracket, the difference in taxes owed would be $7,315. Now consider if you did that for a decade and the tax savings would be $73,150. That’s real money.
2. Be Aware and Plan for Your Tax Bracket
The federal tax system is progressive, so the marginal tax rate increases as income rises with rates starting at 10% and rising all the way up to 37%. Think of each tax bracket as a bucket that you will fill up.
For 2026, a single filer will pay a 10% rate on their first $12,400 bucket of income. In the second bucket between $12,401 – $50,400, you pay 12% and so forth up to your earned income. Someone with higher income will typically pay a higher ‘effective’ or average rate because they have more income that is taxed at progressively higher rates.
In practice, that means that a taxpayer should be aware of the breakpoints between brackets and seek to manage their income accordingly.
For example: If you are a single filer with a $200,000 base salary, you will fall into the 24% federal tax bracket (for 2026, that’s $105,701 – $201,775). If you get paid a $25,000 bonus, almost all of that will be taxed at 32% not 24% because you’ve crossed into the next higher rate bucket. However, if you maxed out your retirement contributions at $24,500, then your income would fully remain in the 24% bucket so that’s $1,858 in extra tax you didn’t have to pay.
3. Lost Tax Deductions
There are many deductions in the tax code that are income based and they phase out above a certain amount of income. The One Big Beautiful Bill Act (OBBBA) passed in 2025 had two that are particularly significant: the enhanced senior deduction and the increased cap on the state and local tax (SALT) deduction. Taxpayers need to be aware of these phaseout ranges or they can put a deduction at risk.
Here is an example:
Both spouses are over age 65 and have large IRA balances but share a smaller taxable joint brokerage account. In a typical year, they have about $150,000 in income so they’re used to being in the 22% federal tax bracket. In 2025, they decide to buy the vacation house they’ve always wanted and take the $100,000 downpayment from the IRAs.
- They will pay ordinary income tax on that withdrawal but it also pushed their income to $250,000
- It means they are now above the phaseout range for the enhanced senior deduction of $6,000 per spouse.
- They will pay a federal tax rate of 22% on $61,401 of the IRA distribution and 24% on the remainder for a total tax of $22,771
- They will have lost a $12,000 deduction.
So the true cost of taking the money from the IRA instead of the taxable account will be $34,771 in taxes or almost a 35% tax rate.
Review Your Tax Return With an Advisor
Strategic tax planning is usually a team effort involving you as the client, as well as your CPA and your financial advisor. This seeks to ensure that no relevant information is missing during the planning.
The best time to start planning is right after you do your annual tax preparation and file your return in April. The information will be fresh in your mind, and it will give you the balance of the year to implement relevant tax strategies.
Talk with a Halbert Hargrove advisor who can conduct a tax review of your recently filed return and begin tax planning with you for the current tax year.
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