One of the more frequent questions I am asked is, “How can I reduce my tax liabilities?” While this is always a good question to ask, it is all the more important when inflation affects our daily budgets.

Probably the most common response to inflation in general is to find ways to reduce expenses. A blind strategy, however, may backfire by cutting the wrong expenses. Tax advisors, for example, increase value by planning around tax strategies. Reducing tax liabilities is a meaningful strategy against inflation. Cutting your tax advisor could result in an exponential increase in tax liabilities.

The first answer I have to our question is, “Keep good records.” For businesses and real estate investors especially, sloppy recordkeeping results in missed deductions and over-reporting income. In our office, we have seen everything from duplicating income to overlooking entire credit card accounts, which are prime sources of deductions. A sound recordkeeping system will ensure that all expenses and deductions are reflected and that income is correctly reported. The investment in good bookkeeping is well worth the expense because, in the end, the savings are reflected in tax liabilities.

Next, utilize available deductions. For example, folks 65 and older currently benefit from an expanded standard deduction which may handle additional retirement withdrawals. A wasted deduction is an increase in tax. For working families, maximize retirement contributions to reduce taxable income and try hard to avoid costly early withdrawals.

Another strategy is known as “tax loss harvesting”. If investments are sold at a gain, whether short-term or long-term, look for investments which can be sold at a loss to offset the gain. The strategy is most meaningful for short-term investments or folks who are in the 15% or 20% long-term capital gains tax bracket.

Lastly, consider how timing impacts tax liabilities. A prime example of timing is planning ahead for distributions from an inherited IRA. While the rules have changed, there is still flexibility to engineer the timing of distributions. Timing can also be used to consolidate charitable giving to qualify for itemized deductions. Capital gains or other income which can be accelerated or postponed may have the result of changing tax brackets in your favor.

Tax planning most certainly can be used to offset the effects of inflation, and a good tax planning strategy will save more than the cost of the advisor.