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Tax Planning: Minimize Your Lifetime Tax Bill

Effective tax planning forces you to think about how this year’s tax bill will impact next year’s tax bill, which can impact your tax bill 5 years from now, which will impact your tax bill in retirement and beyond.

You have to think about your taxes as an evolving, multi-year process in which you are adding and removing income to your “tax bucket” based on how much you will pay in tax as a result (your marginal tax bracket). 

In our experience, “taxes” are the part of the planning process around which there is the most confusion and the least amount of clarity around what constitutes “having a plan.” 

Tax planning is not just about paying less taxes each year, but about looking at the big picture.

If you're ready to become more intentional with your tax planning, our team is standing by!

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Understanding Tax Compliance vs. Advice vs. Planning

There is often confusion around the different components to tax planning. Let's break down the three main parts of dealing with taxes: compliance, advice, and planning. Think of these three concepts like your 3rd grade food pyramid. Tax compliance forms the foundation (everyone that files their taxes does this in some manner, followed by tax advice (not as common), and finally tax planning, (the least commonly addressed, yet most impactful!)

Tax Compliance Insurance application icon

    Tax compliance means following the rules and filing your tax return correctly. It is simply the process of filing your tax return and making sure you pay the appropriate amount of tax based on your adjusted gross income, marginal tax bracket, and relevant deductions.
    You are making sure that you are compliant with the IRS for the given tax year.    A tax preparer, like a CPA or Enrolled Agent, can help you with this part. They make sure all the right information is included in your tax return.
    Tax preparation is a valuable service, but it is reactive by definition.
    PS: getting a tax refund should not be cause for celebration and does not mean that your tax preparer did a “good job.” This just means that you overpaid the IRS throughout the year and gave them a zero interest loan rather than you getting to keep that money and allocate YOUR money as you see fit.

AdvicePortfolio risk number icon

    Tax advice is when your tax preparer also provides you with single-year tax “advice” and gives suggestions on how to pay less taxes on your current tax return.  They can help you find deductions or strategies to reduce your tax bill today.
    Sometimes, this is the tax version of winning the battle but losing the war.  
    Paying the least amount in taxes each year almost guarantees that at some point in the point you will pay a lot more in tax! The secret to understanding the tax code, is that ALL income will be taxed at some point. Choosing to take a deduction today means adding taxable income later on... and foregoing a deduction today (or choosing to pay the tax) might mean less tax later on.

PlanningRetirement date on calendar icon

    Tax planning is the next level. You are engaged in tax planning if you have a philosophy and strategy designed to pay the least amount of taxes possible over your lifespan.
    Effective tax planning is about using your marginal tax bracket to your advantage and controlling WHEN you pay taxes based on how much in tax you would pay in tax for the same deduction in different years.
    In years when you are going to be in a lower tax bracket, we WANT to add more taxable income to your bucket and in years when you are in a higher tax bracket and already have a lot of income….we want to find ways to take income out. We want to maximize how much each tax deduction actually benefits you in the year that you take it! Instead of just focusing on one year, you consider how your tax decisions now will affect you in the future. It's like playing chess and thinking several moves ahead.


Tax Planning Is What We Do.

How Does Tax Planning Work?

In tax planning, you use your marginal tax bracket to your advantage. That means you figure out when it's best to pay taxes and when to reduce your taxable income. For example, if you're in a lower tax bracket this year, it might be a good time to add more income to your "tax bucket." But if you're in a higher tax bracket, you might want to find ways to take out less income. The goal is to get the most benefit from each deduction or tax strategy.

Our Tax Planning Approach

Tax planning is a crucial aspect of your financial strategy. It involves developing a philosophy and strategic approach to minimize your tax liability over your entire lifespan. While many individuals focus on reducing their tax bill each year, effective tax planning requires a broader perspective. It necessitates considering how your current tax decisions will impact future tax liabilities, including during retirement.

If you're looking for a  tax preparer we have CPA relationship partners that we confidently/enthusiastically recommend...We have tax partners that specialize in working with W2 & RSU income earners and then we have partners that cater to small business owners and 1099 income earners. While you absolutely do NOT have to use one of our vetted CPA partners (we are more than happy to connect with your CPA as needed), many of our clients love that you have one, coordinated financial team working behind the scenes with you.

Ready To Embrace Comprehensive Tax Planning?

To make the most of tax planning, keep these things in mind:
  • Taxes are not just a one-time thing. It's an ongoing conversation you should have throughout the year.
  • A tax preparer is helpful, but it's just as important to work with a financial planner who can help you plan for your future tax bills.
  • Taxes affect your investments too. Make sure your investment strategy considers the tax implications.
  • Estate planning and risk management are connected to taxes. They can impact your overall tax bill, so it's important to think about them together.

Start Your Lifetime Tax Planning Journey

If you're ready to take control of your taxes and pay less over your lifetime, we're here to help. Schedule a Right Fit Call to talk about your financial situation and how we can assist you in planning for your taxes.

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