A good financial plan should take into consideration the tax implications of all financial decisions.  There is some tax planning already embedded in some of the financial decisions we make (such as contributing to our retirement plans at work), but often there is a lot more we can do to optimize our situation when it comes to filing our taxes.  And, since we file our federal and state taxes each year, tax planning should happen just as frequently.  So, let’s dive in! 

What is tax planning? 

Consider this: According to Playbook, the average American will pay an estimated $524,625 in taxes throughout their lifetime. That is a lot of money; it represents roughly 34.7% of their estimated lifetime earnings.  

Tax planning is something that should happen all year long, not just when it comes time to file your taxes. What you do throughout the year has a direct impact on the taxes you will owe or the tax refund you can expect  when you file.  This is particularly true for retirees and business owners.   

Tax planning strategies can aim for more than just reducing your taxable income each year. In some cases, tax strategies can also provide a benefit by offsetting the future costs for health care (think HSA) or providing for your retirement (for example, funding a 401(k), IRAs, Roth IRAs, etc.). Chances are you are already doing some tax planning by making contributions to your retirement accounts, education accounts, etc. 

Tax strategies can encompass both short-term and long-term objectives.  Short-term tax planning generally happens close to year-end. This is typically focused on what you can do at the end of the year to reduce your taxable income.  It can include making additional contributions to an IRA or a pre-tax retirement savings like a 401(k); contributing to a 529 college savings plan; realizing investment losses to offset realized capital gains or maxing out your charitable contributions.  It may also mean considering Roth conversions in a year when your income is particularly low due to a job change/loss, or retirement. 

The end of each year is also a time to learn lessons for longer-term tax planning.  Whether it’s identifying tax credits you missed out on during the past year, readjusting your tax withholding for the coming year, or maxing out your retirement contributions over the course of the year, the goal is to plan and take advantage of the opportunities available for the next tax year.  Tax planning does require that you stay organized and are able to access and evaluate the specifics of your financial life for any given time frame.   

What are the Benefits of Tax Planning? 

As you might expect, the magnitude of the benefits from tax planning can vary.  Most common planning can: 

-reduce taxes owed 

-make sure you are taking advantage of tax deductions and credits 

-help avoid unpleasant surprises at tax time 

-increase your own knowledge of your financial situation 

-provide awareness of IRMAA tiers (for Medicare recipients) 

-help save money over the long-term 

Taxes are often one of the top three expenses for retirees. (The other two are usually housing and healthcare.)  Tax planning is important for retirees when it comes to determining a withdrawal strategy of their assets to fund their living expenses.  Tax-deferred accounts are taxed differently than non-retirement accounts.  The addition of social security and/or pension income adds another level of complexity.  If you continue to work into retirement, there are additional tax-related considerations. 

There is a “cadence” to all of this and working with trusted tax and financial advisors in tandem can provide the best outcome.  Combined meetings and conference calls are very helpful.  When your advisors can work together to determine the optimal solutions for you and your family, everyone is better off. 

Whatever your financial situation, we encourage you to ask your questions and share your concerns with us. 

Mosaic FI, LLC is a State of Illinois registered investment adviser. The opinions expressed herein are those of the firm and are subject to change without notice due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of Jenifer Aronson and Leslie Meisner, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes October 1, 2024. 

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