Taxes are often one of the biggest barriers to building and preserving wealth. While many mistakes are easy to avoid once you’re aware of them, they still show up frequently in financial planning conversations. At Financial Enhancement Group, we regularly see the same tax missteps year after year — the good news is, most can be corrected with a few proactive strategies.
One of the most common mistakes is misunderstanding how capital gains are taxed. Investments held for less than a year generate short-term gains, which are taxed as ordinary income at your marginal bracket. By contrast, investments held for more than a year qualify for long-term capital gains rates of 0%, 15%, or 20%, depending on income. Simply recognizing the difference can have a significant impact on your tax bill.
Another pitfall is overlooking tax-loss harvesting when rebalancing a portfolio. This strategy involves selling investments at a loss to offset gains elsewhere. When done carefully, it can lower taxable income without disrupting your long-term investment approach.
Investors also tend to forget about state taxes. Most conversations focus on federal tax brackets, which range from 10% to 37%. But many states impose additional taxes on income, withdrawals, or capital gains. Ignoring them can lead to unpleasant surprises. A sound plan should weigh both federal and state brackets before making distribution decisions.
Underutilizing tax-advantaged accounts is another common oversight. Not contributing enough to capture an employer’s 401(k) match, for example, leaves free money on the table. Depending on your income, a traditional IRA contribution may be deductible, and in some cases, converting to a Roth IRA can provide future tax-free growth. Other accounts can add even more benefits.
- Health Savings Accounts (HSAs): Contributions are deductible; growth is tax-free, and withdrawals for qualified medical expenses are also tax-free.
- 529 College Savings Plans: In Indiana, contributions may qualify for a state tax credit, and withdrawals for qualified education expenses are tax-free.
Each of these tools can help reduce today’s tax liability while strengthening your long-term financial position.
It’s easy to assume that the basics of tax planning are already covered. But in practice, opportunities are often missed because they aren’t reviewed on a regular basis. Tax planning is not just about reporting numbers to the IRS — it’s about making thoughtful, forward-looking decisions before the year ends so you can keep more of what you’ve earned.
By carefully timing capital gains, harvesting losses, accounting for state taxes, and maximizing contributions to tax-advantaged accounts, you can save money both now and well into the future. Your tax situation is unique, and even small adjustments can create lasting benefits. With regular reviews and guidance from professionals who understand the full picture, you can avoid costly mistakes and make smarter choices for your financial future.
Financial Enhancement Group is an SEC Registered Investment Advisor.
