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Why Proactive Tax Planning Can Transform Your Financial Plan

Filing your taxes brings different emotions, thoughts, and oftentimes, frustrations. But taxes don’t have to be stressful. Incorporating proactive tax planning into your financial toolbox will change the way you view your taxes. 

The reality is that many people think that taxes are a once per year financial chore. However, the truth is that the conversations and planning around taxes have a much more ritualistic presence in your financial plan. 

What makes proactive tax planning different, and how can it take your finances to the next level?

What Is Tax Planning?

There is an important difference between tax preparation and tax planning. Tax preparation is where you and your tax preparer (CPA, EA, tax specialist, etc.) file your return with the federal and state governments. In contrast, tax planning is more of a proactive, forward-looking practice that takes a holistic view of your overall financial picture, to optimize for long-term tax benefits.

Everyone that is required to file their taxes must engage in tax preparation, but not everyone is required to participate in proactive tax planning. The difference is critical because those that make the extra effort will see material value through long-term tax-savings. Tax preparation is reactive, whereas tax planning is proactive.

Proactive tax planning can create more flexibility down the road and into retirement. The following are several examples of tax planning decisions that need to be thought through in advance:


  • Should you take advantage of your employer’s Roth 401(k)?
  • Maximizing your marginal tax bracket through annually assessing Roth conversion opportunities?
  • Is your taxable portfolio as efficient as it can be?
  • Are municipal bonds right for you?
  • In an outlier income year, do you need to pay more in estimated tax payments to prevent under-withholding penalties?
  • Bunching of charitable contributions through the use of a donor-advised fund?

How Does Tax Planning Work?

In practice, there are a lot of moving pieces when it comes to tax planning. Ultimately, tax-conscious practices keep more money in your pocket and less in Uncle Sam’s.

On one level, the goal is to structure your financial picture in a way that yields the least amount of taxes over time. This could be anything from timing big purchases, controlling your tax bracket, or involving oneself in specific investment opportunities. 

An essential tax planning strategy within this category is “asset location”, which is just as critical as “asset allocation”. Asset location seeks to house different securities in the most tax-efficient location. For example, you want to “locate” less efficient and higher-yielding investments, such as real estate investment trusts (REITs), in tax-deferred accounts (like IRAs). Passive investments, such as index funds, should be used in taxable accounts.

On a separate level, tax planning is something that must be looked at throughout the year. Specifically, there are a lot of year-end items that must be completed by December 31 well before the standard tax deadline of April 15. To make these decisions, one must work with their tax team (financial advisor, CPA, etc.) to build out a projection and/or run various scenarios.

Taxes Are A Part Of Your Entire Financial Plan

A common saying is to “not let the tax tail wag the investment dog”. This is very true, but it is also true that taxes play a large part in any investor’s long-term success. Once you start looking, you will see that taxes inundate every aspect of your financial life. It’s critical to make a plan to minimize your taxes and put more money towards your goals.

When it comes to all of the key building blocks of any financial plan, there is no way to avoid the impact of taxes. It is nearly impossible to make any financial decision without also taking taxes into consideration. This applies to retirement planning, college planning, investment planning, charitable giving, estate planning, and more.

While every financial situation has many layers, we understand that the ultimate decision will be up to you. Your answer will never be “wrong”, as it will have to be a happy (and personal) balance between the math, tax, and emotional answer. Our goal is to provide clarity on all potential solutions and tax planning is considered in every aspect of our recommendations.

A Trusted Advisor Can Help

Working with an advisor who knows your unique goals and opportunities is best suited to help you build a tax strategy that works for you in the long-term. Proper tax planning starts in January and keeps building as the year goes by. It is very important to be intentional and deliberate with your financial plan.

Our goal is to help our clients navigate the tax road ahead year-by-year. In this fashion, we also anticipate changes in tax law (which occur every five to seven years on average). By making tax planning a focus within your financial plan, we are able to optimize for your long-term tax savings. In this way, you will not be in the dark come the tax-filing deadline.

Schedule Time To Talk Tax

When taxes and expectations are managed effectively, there are fewer surprises at tax time. Proactive tax planning and wealth management begin during the first meeting of the calendar year. Let’s do it together. Schedule a call with us today.

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