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What is Tax Planning? Thumbnail

What is Tax Planning?

Tax planning is a highly valuable piece of your financial plan. Read on to understand what tax planning is, what it is not, how tax planning compares to tax preparation, and review some examples of tax planning strategies.

What is Tax Planning?

Tax planning, as opposed to tax preparation, is a forward-looking, proactive process of matching your goals with tax-advantaged opportunities. Tax planning combines your goals and resources with the best-suited tax strategies, with the ultimate objective of legally minimizing your lifetime tax burden.

Understanding your priorities is critical because the goal of tax planning is not to minimize taxes for the sake of minimizing taxes. The goal is to minimize taxes on the path to your financial goals.

For example, you don’t necessarily want to make a big charitable gift just to reduce your taxes. But if you are charitably inclined, you can evaluate tax strategies to reduce your tax bill and maximize your charitable impact.

What’s the difference between Tax Planning and Tax Preparation?

Tax planning and tax preparation are two very different services.

While tax planning is an ongoing and proactive piece of your financial plan, tax preparation is the annual act of putting together your tax return. Tax preparation is a retrospective look at the last tax year, putting together your taxable income, deductions, and other taxable events.

Tax preparation is what individuals (or our CPAs) are busy completing in the first several months of the year before the April 15th deadline.

Who provides Tax Planning vs. Tax Preparation?

Because tax planning requires a holistic understanding of your finances and goals, it is often provided by financial advisors (although not every financial advisor provides this service).

Tax preparation is often provided by accountants or CPA firms, or a self-service tech platform like TurboTax.

Some financial advisors and some CPA firms may include both tax planning and tax preparation as part of their offering.

Tax Planning Examples

Given an understanding of your resources (income, assets, debts) and goals, you can evaluate tax planning strategies for your household.

Below are several common examples of financial situations or goals, and some of the tax planning opportunities that accompany them.

Tax planning examples

Retirement Savings

Several tax-advantaged accounts (401(k)s, 403(b)s, 457, IRA, HSA, etc.) are available for retirement savers. After determining your retirement goals and savings, you can evaluate these tax-advantaged accounts and develop a plan to optimize your savings.

In addition to these account types, there is the question of whether to make Traditional (pre-tax) or Roth (after-tax) contributions. Understanding your current tax picture and expected tax picture in the future will help you make an informed decision about whether Traditional or Roth is right for you.

Advanced strategies such as Backdoor Roth IRAs or Mega Backdoor Roths may also be considered.

College Savings

529 plans, Coverdell plans, and UGMAs/UTMAs offer differing tax advantages for education savings.

Your state may also offer a tax incentive for contributions to a 529 plan.


Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs) both offer tax-advantaged savings for qualified healthcare expenses. Which account type you are eligible for depends upon your health insurance plan.

HSAs can also boost retirement savings beyond the “traditional” retirement accounts like 401(k)s and IRAs.


Dependent care FSAs allow individuals and families to set aside funds pre-tax for qualified expenses, like daycare, summer day camps, before- and afterschool care, and more.

High-Income Years

During high-income years, you can seek opportunities to reduce your taxable income: pre-tax retirement savings, FSAs and HSAs, bunching charitable giving, and more. Although your income may exceed Roth contribution limits, you can explore making Backdoor Roth IRA contributions.

Low-Income Years

During low-income years, you can seek to recognize more income today to ultimately reduce your tax burden in the future. Recognizing more income could mean making Roth retirement contributions, performing Roth conversions, or recognizing investment gains (tax-gain harvesting).

Approaching Retirement

As you approach retirement and begin withdrawing from your portfolios, additional opportunities arise.

Roth conversions may look attractive if you are retiring early and expect a few years between work and taking social security and required minimum distributions. Developing a spending plan to smooth your tax burden over the length of retirement also becomes critical, as well as understanding how your income will impact your Medicare premiums.

Charitable Giving

Through a few charitable giving strategies, you may be able to increase your charitable impact and reduce your taxes.

Rather than gifting cash to charity, you could gift appreciated stocks or investments. By gifting these securities, you would not recognize taxable gains, the charity would receive the full value of the gift, and you may gain an additional tax deduction.

Also, due to the greater standard deduction since the Tax Cuts and Jobs Act, you may not be receiving a tax break for your gifting. By bunching your charitable giving, like through a Donor Advised Fund, you could make the same contributions and receive a tax benefit, among other advantages.

Your Tax Planning

No tax planning strategy is appropriate for everyone. The value of any one tax strategy will change over time and certain tax planning opportunities will become more or less important over your lifetime.

But with an understanding of your current situation, resources, and goals, you can begin to explore tax planning strategies that may ultimately help you reach your goals more efficiently, minimizing your tax burden in the process.