Tax Planning
Just about everyone does tax preparation, yes?
But not too many people do tax planning.
Do you?
Should you?
Tax Preparation
Maybe you prepare your taxes yourself. Or maybe you hire a tax professional to do it for you.
But you probably submit your tax return each year.
Tax preparation is inherently backward-looking. It's reviewing what happened during the previous year, filling out some forms, and then reporting to the IRS (and perhaps your state) how much tax you owe.
It's being reactive.
Sure, it's necessary, in fact it's legally required, so you deserve a pat on the back for getting it done.
But it's not moving the needle when it comes to your future Financial Health.
Tax Planning
Tax planning, on the other hand, is looking out to the future.
It's being proactive.
It's asking the question: What can you do to lower your tax bill?
Sometimes there are things you can do now before year-end to lower the current year's taxes.
But I've found in working with clients that the more powerful moves need to be made years in advance.
That is, really thinking through strategies that you can implement now that will save on long-term taxes. The idea is to think in terms of decades, rather than just months.
An example of this would be the decision of whether you should contribute to your Pre-Tax 401(k) or your Roth 401(k). With one you pay taxes later, and with the other you pay taxes now. Which is better for you?
Another way to think about it is to strategize how you can position yourself to lower your lifetime tax bill. Those tax savings could show up now, or they could be far in the future. But by planning ahead, you're more likely to pay less tax over the long term.
In fact, it's often best to even think beyond decades, to think about the consequences of what you do now on the taxes that your heirs may pay on what they inherit from you.
Tools & Approach
Leading up to every year-end, Spencer Financial Planning has a Tax Planning meeting with each client. We look at their situation and think through any tax or investment moves they should make in order to improve their lifetime tax situation.
It's actually quite a bit of fun (said the tax nerd).
And it's SO worthwhile.
Smart tax planning can mean paying literally hundreds of thousands of dollars less in lifetime taxes for many people. Seriously, it can be that impactful.
If you're interested, here's my general philosophy and approach to tax planning:
We should pay our fair share of taxes, but no more.
Taxes should be managed over one’s lifetime, not just on a year-by-year basis.
Get creative and have fun!
Three things to ask yourself before implementing a tax strategy:
Is the additional time & work worth the savings?
Do you have a plan to reinvest the savings in a productive way?
Does the strategy create more confusion and headache than you want?
I'll end by including a slide showing the various strategies we consider for clients. We consider each one for each client, and then zero in on the ones that make sense for each particular person.
Feel free to use this slide to help you think through your own situation. You may be able to do much of it on your own, or you may want to work with a financial planner or accountant who specializes in tax planning.
