Taxes are an important part of your financial plan. Unfortunately, the world of taxes is often boiled down to a single event of filing them to the IRS, hoping for a return and that you didn’t make any mistakes on your documents.
While filing taxes is an important part of your financial housekeeping, it is far from the only way that taxes impact your financial strategy. In fact, you could say that tax preparation is a reactive approach. You fill out the forms, submit them to your CPA, and that’s that. However, you can do so much more with your tax preparation that takes a proactive approach.
Our advisors at TFS are focused to help you create a comprehensive financial plan that looks at each and every aspect of your finances, including taxes and strategies to help optimize your finances which can help you reach your goals.
When it comes to taxes and financial planning there are two processes that you should know: tax preparation and tax planning. What is the difference between these two processes and how do they work together in your financial plan? Let’s take a look and find out.
The basics of tax preparation
Tax preparation is a process that all working people know well: organizing, preparing and sending taxes at the state and federal levels. Tax preparation is the actual process of organizing your W-2s, 1099s, and other documents to illustrate how much money you have paid in taxes (and what deductions you are able to take) for the previous year.
This process often requires a professional tax preparer who will assist you in organizing and filing the necessary documents on time. Your tax professional will be an expert on tax law, ensuring that every line of your return is filled out and filed correctly. With the right professional help, you will be able to rest assured knowing that your return is in compliance with both state and federal regulations.
Normally, you will work with your accountant or tax professional once or twice per year to ensure everything is in order but not much beyond that. Your tax preparer will be able to give you general advice on your taxes like which deductions to take and other basic strategies but they won’t be able to provide more comprehensive advice to proactively prepare for a better tax year.
Why is that?
The main reason is that comprehensive tax advice falls way beyond the scope of properly preparing and filing your taxes. This type of holistic advice takes much more time, knowledge, and expertise about your financial situation to get right. Once you get into the realm of tax strategies, that is when tax planning comes into play.
Tax preparation looks backward, focusing on what you did the previous year. Whereas tax planning focuses on the future and seeks to provide strategies to put you in a strong financial position from that tax lens.
Additionally, tax preparation utilizes the limited time available from your tax professionals during tax season. Returns are often filed in a short time window, and even the best-intentioned tax advisor needs to schedule the planning for clients outside of tax season. However, many clients stop thinking about their clients after April 15th – making it tough to adequately plan for the next year. That is why, at TFS, we have a continued focus on the tax impact of our work together. Let’s take a closer look at how tax planning works.
The ins and outs of tax planning
Tax planning is a comprehensive process that seeks to include proactive tax-efficient measures into your financial plan. With tax planning, each part of your financial plan is looked at from a tax perspective. It seeks to add a strong tax strategy to your existing financial plan and how your plan operates on a day-to-day basis.
Tax planning includes understanding your goals, values, and priorities in order to help establish a plan that will work for you. Naturally, this type of comprehensive work is less focused on your physical return and more focused on setting yourself up to be in a strong tax position.
Believe it or not, taxes are an integral part of your plan’s structure and overall execution. A few examples of the areas in your life that are impacted by tax planning are:
- Management of your tax bracket both now and in retirement
- Creation and management of your investment portfolio including asset location and asset allocation
- Risk tolerance and portfolio assessments
- Retirement savings vehicles (401k, IRA, etc.) and distributions
- Roth IRA conversions
- Potentially improving your returns through tax-loss harvesting
- Charitable giving
This type of work requires more regular meetings with your financial advisor and inspires you to proactively plan ahead for your financial future.
Tax planning is an ongoing process that shifts and evolves as you and your plans do. It is important to reevaluate your plan as things change and as you move into different phases of your life.
Note: Neither FSC or its representatives provide tax or legal advice.
Your tax plan as a pre-retiree may look different than when you are actually in retirement. It all comes down to your goals and vision for the future and using your money as a tool to help you get there.
How your financial advisor can help
Here at TFS, we believe a strong financial plan is a comprehensive, balanced, and well-rounded one that is based on your goals and dreams for the future. Taxes play a crucial role in the development and execution of your plan.
Both tax preparation and tax planning are important and complementary processes to providing you with a plan that can help you meet your financial goals.
We are passionate about helping our clients pursue their goals with a financial plan that is truly tailored to their needs. Interested in how your tax strategy can boost your financial plan? Schedule a time to talk with us. We can’t wait to help add dimension and strength to your financial plan.