Financial Fundamentals: Tax Planning Explained

By Brendan Halleron, CFP®, AIF®

What’s Included

• What Is Tax Planning? 
• Why Does Tax Planning Matter? 
• What Areas Does Tax Planning Cover? 
• Income Tax Planning Explained 
• Retirement Tax Planning Explained 
• Investment Tax Planning Explained 
• Charitable Giving Tax Strategies 
• Estate & Legacy Tax Planning 
• Common Tax Planning Strategies 
• When Should You Review Your Tax Plan? 
• Common Tax Planning Mistakes 
• Tax Planning and Financial Planning

Benjamin Franklin popularized the phrase, “Nothing can be said to be certain, except death and taxes.” Even then, the significance of taxes was well-appreciated (remember the Boston Tea Party?). While a solid understanding of taxes is vital to executing a financial plan, there is a key difference between tax planning (looking forward) and tax prep (looking backwards). 

While the goal is never to pay the most taxes (we all have to pay something), there’s no statute that you must leave a tip for the federal government. Tax planning helps avoid just that. 

What Is Tax Planning?

Tax planning is an ongoing process of making financial decisions in ways that legally minimize taxes and help improve after-tax outcomes. 

Rather than focusing solely on filing a tax return each year, tax planning involves proactively evaluating:

• Income
• Investments
• Retirement accounts
• Charitable giving
• Business activities
• Estate planning strategies 

The goal is simple: make informed decisions that help you keep more of what you earn, and direct those dollars toward your own financial goals rather than pay more in taxes than necessary.

Why Tax Planning Matters

Taxes affect nearly every aspect of your financial life, from investment returns and retirement withdrawals, to business income and estate transfers. Without a tax strategy, you may end up paying more than necessary or miss valuable opportunities to reduce your tax burden. 

Effective tax planning can help improve cash flow, increase long-term wealth accumulation, reduce surprises, create a better inheritance for future heirs, and align financial decisions with your broader goals. 

Practical example: withholding taxes from your paycheck. How do you know you won’t be stuck with a large surprise bill come April based on what your company withheld on your behalf? Tax planning works to address these issues before they become costly surprises. 

What Does Tax Planning Include?

Income Tax Planning

Income tax planning focuses on understanding how your income is taxed and identifying opportunities to reduce your overall tax liability, or strategically expedite income creation depending on life circumstances. 

This often begins with managing taxable income and understanding the difference between your marginal tax rate, which applies to your next dollar of income, and your effective tax rate, which represents the average rate paid across all of your income. By understanding how tax brackets work (both federally and for your specific state), individuals and families can make more informed decisions about compensation, business income, investment earnings, and retirement distributions. 

Another important aspect of income tax planning is the timing of income and deductions. In some situations, it may make sense to accelerate deductions into the current year or defer income into a future year when tax rates may be lower. Coordinating these decisions can help smooth taxable income over time, potentially reduce exposure to higher tax brackets, and help improve long-term outcomes.

Retirement Tax Planning

Retirement tax planning focuses on making decisions about how retirement savings are accumulated and eventually withdrawn. One of the most important considerations is choosing between Traditional and Roth accounts, depending on which may be more appropriate based on your circumstances.

Traditional retirement accounts may provide a tax deduction today, while Roth accounts are typically funded with after-tax dollars and can provide tax-free qualified withdrawals in retirement. 

Determining which approach makes sense often depends on your current income, future tax rate expectations, and overall long-term financial goals. 

The dirty secret: mathematically speaking, it may not make a difference which you pick. 

If your tax rate is the same today when you contribute as it is in the future when you withdraw the funds, the outcome may be the same either way. 

However, the million-dollar question is: what will my tax rate be in the future? We don’t know, but we can make informed assumptions based on your goals. 

Tax planning does not stop once retirement begins. Developing a retirement income strategy that coordinates distributions from taxable, tax-deferred, and tax-free accounts can help manage taxes throughout retirement. Retirees must also plan for Required Minimum Distributions (RMDs), which generally require withdrawals from certain retirement accounts beginning at a specified age (age 73 for many individuals, but is phasing into age 75 under current law). 

Proactive planning can help avoid unexpected tax consequences and create greater flexibility during retirement.

Investment Tax Planning

Investment tax planning focuses on maximizing after-tax returns rather than simply chasing the highest investment performance. Taxes can significantly impact long-term wealth accumulation, making it important to understand how different investments are taxed. 

Capital gains, dividends, interest income, and mutual fund distributions may all receive different tax treatment. By carefully managing gains and losses, investors may be able to reduce the taxes they owe and improve overall portfolio efficiency. 

A tax-efficient investment strategy also considers where assets are held. 

For example, investments that generate substantial taxable income may be better suited for tax-advantaged accounts, while investments with more favorable tax treatment may be appropriate for taxable accounts. 

This concept, known as asset location, works alongside investment allocation to help investors keep more of what they earn over time. 

However, tax considerations should not be the sole driver of investment decisions. Some exceptions exist, such as an investment that has a significant embedded gain (this can become a long-term issue), or an investment that has superior returns to its given benchmark (it does not make sense to sell a great asset when even after-tax it outperforms). 

Charitable Giving Strategies

Charitable giving can be a powerful way to support causes you care about while potentially creating meaningful tax benefits, but this only makes sense for individuals who want to give first and foremost. 

Seeking tax benefits if you are not charitably inclined is incongruent. But for individuals who are charitably inclined, planning can help maximize both the impact of gifts and the available tax advantages. 

Strategies such as gifting appreciated securities may allow donors to avoid capital gains taxes while still receiving a charitable deduction if certain requirements are met (assuming they itemize and exceed the standard deduction). 

Donor-advised funds allow individuals to make a charitable contribution, potentially receive a current-year deduction, and recommend grants to charities over time. 

For retirees who meet age requirements (70 ½ or older), Qualified Charitable Distributions (QCDs) can enable direct gifts from certain retirement accounts (such as IRAs) to qualified charities, which may help satisfy Required Minimum Distribution (RMD) obligations while avoiding taxable income. 

Through thoughtful planning, charitable individuals can align gifting goals with tax-efficient strategies.

Estate and Legacy Planning Considerations

Estate and legacy planning extends tax planning beyond your own lifetime and focuses on efficiently transferring assets to future generations and charitable organizations. Understanding how assets pass to heirs is critical because different types of assets can have different tax consequences. 

For example, beneficiaries may inherit taxable investment accounts, retirement accounts, or other assets that each carry unique tax rules and planning opportunities. By aligning tax planning and estate planning strategies, families may be able to preserve more wealth for future generations while reducing potential complications and tax burdens for heirs. 

One example of tax planning and estate planning working together is creating income via Roth conversions during the ‘income valley’ years, or the years between retirement and social security or Required Minimum Distributions. While the tax payoff over your own lifetime may be valuable, it may be exponentially more valuable for your heirs given their tax rates and potential for continued tax-free growth over 10 years.

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Common Tax Planning Strategies

The act of tax planning involves looking through your most recent tax return and analyzing opportunities for either tax avoidance or strategic income creation, depending on your situation. 

It’s looking at the bigger picture (e.g. federal tax rates, deductions, state-specific tax treatment) and evaluating what opportunities are available (e.g. certain states offer specific deductions for their own state’s 529 plans, some states do not tax retirement distributions, etc.). 

The most common tax planning strategies we see utilized include:

• Strategic Roth conversions
• Tax-loss (or gain) harvesting
• Bunching charitable deductions
• Qualified Charitable Distributions (QCDs)
• Maximizing retirement plan contributions

Certain strategies not only rely on a specific timeframe, but also your goals and circumstances. 

For example, if a client wants to save on taxes but is not charitably inclined, it does not make sense to consider bunching charitable contributions. 

 

In another example, a client who thinks their income will increase in the future due to required minimum distributions (RMDs) may want to convert more of their pre-tax IRA dollars to Roth dollars now in order to pay a lower effective tax over time while navigating IRMAA (Income Related Monthly Adjustment Amount) premiums for Medicare. 

Tax laws, income levels, and personal goals and circumstances change over time. Effectively navigating these changing dynamics can help create meaningful tax savings over one’s lifetime. 

When Should You Review Your Tax Strategy?

As mentioned previously, tax planning is an ongoing process rather than a year-end exercise. Major life events such as marriage, divorce, retirement, the sale of a business, receiving an inheritance, changing jobs, or significant investment activity can all create new tax considerations. 

In addition, changes in tax laws (e.g. One Big Beautiful Bill Act (OBBBA) in 2025) may create planning opportunities or require adjustments to an existing strategy. Reviewing your tax plan at least annually helps ensure it remains aligned with your financial goals and current circumstances.

Common Tax Planning Mistakes

One of the most common tax planning mistakes is waiting until the end of the year to think about taxes. By then, many opportunities to reduce taxes may no longer be available to you. Or, even if the opportunity still exists, you may be under a time constraint to finish a particular strategy before December 31st.

Other common errors include:

• Failing to coordinate investment and tax decisions
• Overlooking retirement account strategies
• Neglecting estimated tax payments
• Focusing solely on minimizing taxes in the current year without considering future consequences

The best-executed tax plans are implemented with clients, financial advisors, and their accountants all working together.

How Tax Planning Fits into a Comprehensive Financial Plan

Tax planning is a critical component of a comprehensive financial plan because it can make a tangible difference. Tax planning can influence investment returns, retirement income, estate transfers, business decisions, and charitable objectives, both today and well into the future.

When taxes are coordinated with the rest of one’s financial plan, individuals and families may be better positioned to preserve wealth, pursue their goals, and create more efficient outcomes across generations.

Tax Planning Is an Ongoing Process

While not everyone’s favorite subject, tax planning is a sure way to guide your financial plan and to make informed decisions that can help improve long-term financial outcomes. Rather than focusing solely on tax preparation each year, proactive tax planning considers how income, investments, retirement accounts, charitable giving, and estate strategies can work together to help create greater tax efficiency, even if you are nowhere near retirement age.

Regularly reviewing your tax strategy can uncover opportunities, help you avoid costly mistakes, and align your financial decisions with changing tax laws and personal goals.

Wondering how tax planning could impact your financial future? A conversation with a financial planner can help you evaluate strategies that may support your long-term objectives.

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FAQ

What is tax planning?
Tax planning is the continuous process of making financial decisions that work toward optimizing taxes and improving after-tax outcomes. The goal is to legally minimize taxes while supporting your broader financial goals.

What is the difference between tax planning and tax preparation?
Tax planning is forward-looking and focuses on strategies that may reduce future taxes, while tax preparation is the process of reporting what already happened during the tax year on your tax return. Planning is a continuous, long-term process while preparation is a reporting requirement. 

When should I start tax planning?
Everyone should consider tax planning, regardless of age or income. Tax planning is an ongoing process that evolves as your investments, family situation, and goals change. The sooner you begin tax planning, the more time you will have to pursue potential strategies. Don’t wait until the end of each tax year to try and save on taxes. 

How does tax planning fit into financial planning?
Tax planning is a core component of financial planning, as taxes affect nearly every other aspect of your financial life: retirement, investments, estate planning, charitable giving, and cash flow decisions. Coordinating tax strategies with your overall financial plan can help you keep more of what you earn and improve long-term outcomes.

Can tax planning help reduce taxes in retirement?
Yes, effective tax planning can help lower lifetime taxes by strategically using different account types, managing withdrawals, becoming eligible for certain deductions, and staying within specific margin tax brackets. Planning ahead can provide greater flexibility and potentially reduce taxes on retirement income, Social Security benefits, and your estate. 

The views represented are not meant to be construed as advice. Moreover, no client or prospective client should assume that this content serves as the receipt of, or a substitute for, personalized advice from Affiance Financial, or from any other professional. 

You should always consult an attorney or tax professional regarding your specific legal or tax situation. All investment strategies have the potential for profit or loss.

Affiance Financial does not serve as an accountant and does not prepare tax returns.

A Roth IRA conversion may not be suitable for your financial situation.