What Is Tax Planning (And Why It Matters)
You can think about tax planning like preparing for a test in school.
Late-night procrastination might lead you to a passing grade, but the best way to secure an A is to take a more active path. You should engage the lesson by participating in class, completing homework assignments, learning from mistakes, and thoughtfully preparing for the big test.
Tax planning is a proactive approach, which seeks to infuse smart and effective tax strategies into your financial plan. When you think about taxes, you likely shrug your shoulders and push the thought to another day, but embracing the power of tax planning can save you thousands of dollars per year and bring more security to your financial life.
Let’s take a closer look at what tax planning means and how we apply it to your plan.
What is tax planning?
Taxes claim to fame is annual filing in April. Most people don’t like to think about their taxes at any other point than that two-week window. But this event isn’t tax planning, it’s tax preparation.
Tax preparation is the physical process of readying your tax returns for the federal, state, or local level. It’s here that you claim your deductions, find your credits, harvest your losses, and more in hopes that you don’t need to sign a big check to the IRS.
Many families work with a professional to help wade through the complicated tax codes and lower their bills. Tax preparation is an essential process, but it’s not a substitute for comprehensive tax planning. Come April there is little you can do to change your tax situation. By implementing fundamental strategies throughout the year, you will be more prepared for the next tax cycle.
Tax preparation is reactive, but tax planning is proactive. It looks at your unique situation including your income, dependents, investments, purchases, timing, and more to build a financial plan with taxes in mind.
Proper tax planning ensures tax efficiency. It analyzes each piece of your financial plan from a tax perspective and situates them in a tax-efficient manner. Once you start to look, you will be surprised at the role taxes play in your finances.
Taxes are everywhere
Taxes are an omnipresent aspect of your financial plan. No matter where you look, you will find them. Taxes impact your savings, investments, spending, and general lifestyle. By incorporating tax planning in your financial outlook, you can bring more efficiency to your plan. Let’s take a look at just some areas of your life that are impacted by taxes.
- Tax bracket management
- Reducing income tax.
- Portfolio assessment
- Ensuring you have the right mix of investments. Making the most of asset location (evaluating the tax-efficiency of each security and housing it in the right account). Understanding your risk profile, both tolerance, and capacity.
- Strategic tax-loss harvesting and selling securities that no longer serve you.
- Retirement contributions and distributions
- Tracking and managing contributions to 401k, IRA, HSA, and Roth accounts. This process also includes making strategic plans for RMDs and other withdrawals.
- Charitable giving
- Creating a strategy around annual gifts to both give with your heart while also maximizing tax-efficiency.
- Estate taxes
- Minimize or eliminate estate taxes.
- Timely tax strategies
As you can see, taxes are everywhere. You can find them checking out at the grocery store, in your paycheck, within your investment accounts, at your house, and more. Recognizing the connections and building a plan to reduce your taxes can bring more strength to your plan. Let’s take a closer look at a specific example of tax planning.
Taxes and retirement planning
One of the most notable examples of tax planning is building a retirement plan. Effective tax planning becomes even more critical in retirement, as your income is funneled from multiple sources all with different tax treatments. Here are a few essential ways that tax planning impacts retirees.
- Manage tax bracket throughout retirement.
- Identify all income channels and corresponding tax treatments.
- Coordinate tax-efficient withdrawals.
- Maintain tax-efficient giving strategies like DAFs, QCDs, and more.
- Create tax-efficient estate planning techniques like different trust structures.
Tax planning can help your money work harder and last longer, two qualities vital to a successful retirement plan.
How good tax planning impacts you
Tax planning is an ongoing process, one that shifts and changes as your needs do. Someone who just launched their own business will have different tax needs than a new retiree, for example. Our team of in-house and affiliated CPAs, Wealth Managers, and Attorneys can assist you with comprehensive tax planning at any stage of your life.
Reducing your tax bill gives you more freedom and flexibility to use your finances to support your goals and dreams. We seek to help our clients build a tax strategy that complements their goals and take advantage of critical planning opportunities.
Taxes impact every aspect of your financial life. You need a strategy to optimize them to keep your money working for you. Remember, if April is the tax exam, you want to start preparing well in advance to build a plan that helps you ace that test.
Are you ready to see the difference tax planning can have on your life? Schedule a 15-minute call with our team today.
