5 Tax Management Basics for Families

Tax management is a critical component of financial planning for individuals and families with significant investable assets. As trusted advisors, we aim not only to help grow your wealth but also to protect and optimize it through effective tax strategies. Below are five fundamental tax management principles to help secure your financial legacy for generations to come.

1. Understand your tax bracket and its implications

Knowing your federal and state tax brackets is essential for making informed financial decisions. For individuals with significant investable assets, strategic planning can help reduce the percentage of income subject to higher tax rates. Your accountant or financial advisor might recommend strategies like:

• Deferring income: If you’re close to moving into a higher tax bracket, deferring income to a future year may lower your overall tax liability.
• Tax-loss harvesting: To reduce your taxable income, offset capital gains by selling investments that have experienced losses. This strategy can be especially helpful in volatile markets.

Many “tax management” discussions with financial professionals involve deferred income or tax-loss harvesting. If you are unsure how these strategies apply to your situation, please ask for clarification!

2. Leverage tax-advantaged accounts

Maximizing contributions to tax-advantaged accounts can reduce your taxable income and enhance retirement savings. These accounts provide immediate tax benefits and offer opportunities for long-term financial growth. Consider the following:

401(k) and IRAs

Maximize your contributions to reduce taxable income. The IRS has announced the following retirement account contribution limits for 2025:

• 401(k) Plans:
  • Standard Contribution Limit: $23,500.
  • Catch-Up Contributions for Ages 50-59 and 64+: Additional $7,500, allowing a total contribution of up to $31,000.
• The SECURE 2.0 Act of 2022 allows for an enhanced catch-up for savers ages 60-63:
  • Enhanced Catch-Up Contributions for Ages 60-63: Additional $11,250, permitting a total contribution of up to $34,750.
• IRAs (Traditional and Roth):
  • Standard Contribution Limit: $7,000.
  • Catch-Up Contributions for Ages 50 and Over: Additional $1,000, for a total of $8,000.

Health savings accounts (HSAs)

HSAs are among the most tax-efficient vehicles available, offering three distinct benefits. First, contributions are tax-deductible (or pre-tax, if through payroll deductions). Second, earnings grow tax-free. Many HSA providers allow account holders to invest a portion of their balance in mutual funds or other securities for long-term growth. Third, withdrawals for qualified medical expenses are also tax-free. For investors, this makes HSAs a powerful tool for reducing taxable income while growing assets.

• NOTE: HSAs can also be a strategic supplement to traditional retirement accounts. After age 65, HSA funds can be withdrawn for any purpose without penalty, although non-medical withdrawals will be taxed as income. This flexibility makes HSAs a valuable backup for healthcare costs in retirement.

529 Plans

These accounts allow tax-free growth and withdrawals for qualified education expenses, making them an excellent tool for multi-generational planning. However, the plans and regulations vary from state to state, so be sure to speak with a professional about your options.
 
The guidelines for tax-advantaged accounts change regularly. Before making changes to your accounts, always discuss your plans with a qualified tax professional.

3. Optimize charitable giving

Charitable giving can create a meaningful impact in your community. It is an opportunity to align your financial goals with your values while reducing your tax liability. We encourage all donors to research their options before making major contributions for maximum benefit to all involved. Your charitable giving strategies might include:

• Donor-advised funds (DAFs): Contribute a lump sum to a DAF for an immediate tax deduction and distribute funds to charities over time. There are many avenues for DAFs, however, IMA Private Wealth clients often utilize Charles Schwab’s DAF as it is an easy and convenient way to make transfers from other investment accounts.
• Qualified charitable distributions (QCDs): Individuals over 70½ can make direct transfers from IRAs to charities, reducing taxable income. Some clients choose to do this as part of their estate plan. For 2025, the limit for QCDs to one or more charities is $108,000.
• Bunching donations: Group several years’ worth of donations into one tax year to exceed the standard deduction and maximize itemized deductions.

If you are considering changing your approach to charitable giving in the future, we recommend speaking with your advisor well in advance. There are many great options, and we can help you make decisions that address the latest tax regulations and your particular situation.

4. Plan for estate and gift taxes

For families looking to transfer wealth to future generations, proactive estate planning is crucial to minimize taxes and ensure a smooth transition of assets. Thoughtful planning can help reduce financial burdens on your heirs, protect family wealth, and honor your wishes for the distribution of that wealth.

• Lifetime gift exclusion: In 2025, you can gift up to $19,000 per recipient annually without incurring gift tax. Over a lifetime, the federal estate and gift tax exemption is $13.99 million per individual.
• Trusts: Establishing trusts can shield assets from estate taxes and provide control over how wealth is distributed.
• Step-up in basis: Upon an asset holder’s death, beneficiaries often receive a step-up in basis, which resets the asset’s value for capital gains purposes and reduces tax liability.

Comprehensive estate planning typically requires a team of professionals to address most families’ needs. An experienced financial advisor can be a great starting point and can coordinate the process with you and your tax and estate professionals as you progress through planning.

5. Consider tax-efficient investment strategies

Strategically structuring your investments can help reduce tax exposure. This requires understanding the tax implications of various investments and strategically placing them in accounts that best fit the individual investor’s needs. Options to consider may include:

• Asset location: Place tax-efficient investments, like index funds, in taxable accounts and tax-inefficient assets, such as bonds, in tax-advantaged accounts.
• Roth conversions: Converting traditional IRA assets to a Roth IRA during low-income years can reduce future taxable income.
• Municipal bonds: Income from municipal bonds is typically tax-free at the federal level and may also be exempt from state taxes, depending on where you live.

If you want to explore more tax-efficient investment strategies, ask your advisor which options might be best for your specific life stage and situation.

Tax management is an ongoing process

Tax laws and personal circumstances change, making regular reviews essential. Work with your advisor to adjust strategies based on changes in tax regulations, ensure compliance with tax reporting requirements, and identify new opportunities to minimize tax liabilities.
 
Effective tax management is about more than reducing this year’s tax bill. It’s a long-term strategy to preserve and grow wealth for you and your family. By understanding how these foundational principles fit into your financial plan, you’ll be better positioned to achieve your goals and leave a lasting legacy.
 
Our team of experienced advisors is here to help you navigate the complexities of tax planning. Contact us to discuss how we can tailor these strategies to your unique financial situation.