Wealth Management: Why It’s Critical to Make Time for Tax Planning

tax planning


The U.S. tax code has over 10 million words, making it one of the longest and most complex in the world.  So, while that can make tax planning intimidating, that doesn’t mean you should avoid it.  Overpaying taxes every year can impede your ability to build wealth.  Conversely, finding savings can be an easy way to progress toward your goals faster.  That’s why you should make time for tax planning.  Fortunately, you shouldn’t have to do it all yourself.

One of the Rare Parts of Life Within Our Control

In the realm of building wealth, many people focus on investments.  But these are not entirely within our control.  We can’t control the market, and we can’t influence the economy or other forces that can impact it.

In the longer term, we can make far more progress by focusing on things we can control, such as our expenditures.  And taxes are a significant expense for all of us.  Between federal and state income taxes, payroll taxes, capital gains taxes, property taxes and sales taxes, taxes usually comprise a significant percentage of our overall costs.  Finding ways to cut these liabilities helps us improve our bottom line without the pain of cutting back.

Here’s the problem:  most people don’t set aside regular time for tax planning, so they rarely realize its benefits.

The Difference Between Tax Planning and Tax Preparation

Many people consider the time spent with their tax preparer as tax planning, but it’s not.  That’s tax preparation.  These two activities are not interchangeable.  Understanding the difference is critical to your financial health.

Tax preparation primarily refers to the annual process of gathering documentation and filing your tax return.  The key?  It is reactive.  You’re looking at the past, and your ability to generate savings is minimal.

On the flip side, tax planning is forward-looking.  You are looking for ways to save in the future.  Tax planning is designed to minimize your tax liability proactively.  And when you identify savings, it will usually occur for multiple years in the future.

Bottom line…. tax planning involves looking at and understanding the tax implications of your financial decisions before you even make them.   In that way, astute tax planning decisions can lead to significant savings over time.

The Benefits of Regular Tax Planning

Asking your accountant at tax time if there’s any way to save doesn’t work very well.  They are often short on time, and it’s usually too late to save on this year’s tax bill.  Instead, you should have regular tax planning time scheduled annually (and not during tax season).  At our firm, we include tax planning with you and your accountant in our annual financial planning process so we can help you identify savings opportunities.

Always Consider Taxes

Tax planning is not just about determining how much you owe the government.  It’s about strategically integrating tax rules into your financial life to maximize wealth.  It’s an essential tool in your financial toolbox, just as vital as investing and budgeting.

Imagine a scenario where you’ve made a windfall from an investment or perhaps had a record year in your business.  You’re ecstatic until you realize a significant portion of it will be devoured by taxes.  But what if you could have prepared for this situation in advance, so you could pay only a fraction of that amount in taxes?  That’s the kind of impact that proactive tax planning can have.

Especially when you have an upcoming business sale or are looking to sell a highly appreciated asset, taking the time upfront to look at your options and plan can mean keeping much more of that gain in your pocket.

But be aware that the bigger the event, the more time may be needed to put an optimal tax strategy in place.   So, the sooner you see the event on the horizon, the sooner you should discuss it with your financial planner.

Estate planning also benefits from tax planning.  Do it right, and you can save taxes for yourself and/or your heirs while simultaneously setting up a smooth transfer of wealth in the future.

Even everyday financial decisions can benefit from some tax strategy.  Things like where you hold a particular investment can matter.  Some investments are best held in taxable accounts, whereas others may be more tax-efficient held in a retirement account.

What are Common Tax Planning Strategies?

Because of the complexity of our tax code, tax strategies can take many forms.  Some examples might include postponing or splitting income to stay in a lower tax bracket or grouping certain types of expenses and contributions together to maximize deductions.  More sophisticated strategies may include setting up a trust or using insurance or annuities in creative ways to defer and lower taxes.

Retirement and health savings accounts are often used to take advantage of tax deferral.  And tax loss harvesting can help you minimize capital gains taxes by trading out of losing positions and replacing them with similar (but not identical) stocks or ETFs.

If you’re a business owner, there are usually many other potential strategies that can help you lower your tax bill even more.

Is Tax Planning Legal?

Some wonder if tax planning is legal.  Yes, following the tax code to save money is perfectly legal.  You’re not evading taxes; you’re just using the law to minimize what you pay.

The world’s wealthiest people often pay little or no taxes, legally.  That’s usually because they flex the tax code to their maximum benefit.

Ironically, tax planning can even be preventative.  By working closely with your CPA to follow the tax code, you can often reduce the risk of audits and penalties.

The key is to be proactive and ensure your financial professionals schedule regular times to review your situation.

Hold Your Financial Professionals Accountable

You shouldn’t have to do this alone.  A high-quality financial planner or wealth manager should provide some tax planning help in conjunction with your financial planning (and along with your tax professional).  So be sure you’re getting the help you need to take advantage of tax savings when possible.

Key Takeaway

Yes, this is another task that will require some of your time every year.  But with tax planning, you’ll usually find it a rewarding experience, helping to lower your tax bill so you can free up funds to achieve your goals sooner rather than later.


Wondering if your money can be working harder for you?   

Our GIPS® compliant team of wealth managers and financial planners are here to help you achieve your goals.  If you’ve got $200,000 or more available to invest, contact Arroyo Investment Group for a free financial second opinion to see if we can help.

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