The term “tax planning” is a frequently used term but largely misunderstood by business and property owners and their advisors. To many it means investing into a “tax shelter” of some kind and, perhaps, contributing into a 401(k) or some other qualified retirement plan. It is, however, so much more than that and I encourage every taxpayer to more aggressively tap into the expertise of a professional proactive tax planner to capture thousands of dollars in tax benefits that is often and unknowingly left on the table.
What is tax planning?
Tax planning is the work that you do to arrange your personal and professional activities and assets in ways that legally postpone or avoid taxes. Effective tax planning saves you money that you can reallocate to help meet other needs or to fund interesting projects.
Tax planning takes advantage of all the beneficial tax-law provisions available to you, within the 70,000-page IRS tax code. Some of these provisions are well known, such as the homeowner exclusions that are available to offset a portion of the taxable capital gain when you sell your personal residence. Others are less easy to spot, such as managing a set of real estate properties as one unit and accelerating tax deductions to offset taxes that you would otherwise have to pay. I strongly recommend you identify and take advantage of every tax deferral strategy for which you are eligible.
Tax law is ever-changing and with each change comes opportunity to gain greater tax benefit. Consequently, the benefits of hiring good tax planning advice increase every time Congress passes a law that revises (adds more pages to) the tax code. A Certified Tax Planner is skilled in identifying those laws that lead to saving their clients’ taxes that tax law says they are entitled to keep.
Is my CPA my Tax Planner?
Most CPAs are focused on keeping you in compliance with the tax code and helping you to organize your income and expenses in the most beneficial way possible. Plus, they look at what you did the previous year and filter that information through the laws required for them to come up with a completed tax return. That is useful, important and good accounting; but it is not tax planning.
Indeed, the role of a CPA and that of a qualified tax planner are complementary. CPAs look at historic financial information while the tax planner is more forward-thinking and identifies ways to gain for you tax benefit for the coming years. Both of these professionals should work synergistically together to keep you on the right side of the tax laws, while still capturing every possible tax benefit for which you qualify.
Is my Financial Planner my Tax Planner?
The definition of financial planning is making the most effective and efficient use of only three things that we all have in some measure: accumulated assets, disposable income and the compounding of both of these over time through appropriate investment planning.
Further, four areas of financial planning can be categorized in this order of priority: First is establishing a realistic emergency fund, usually in a fixed account in a bank, savings and loan or credit union; second is tax planning; third traditional investment planning; and, lastly, estate planning.
Financial Planners craft a comprehensive plan to help you reach your financial goals and includes insightful investment planning. Part of that planning almost always includes some form of tax planning, usually relating to establishing and funding the right retirement plan and programs that garner tax deduction. That is good, but it is also basic planning. More advanced tax planning can complement what the financial planner has accomplished in order to gain greater benefit in tax savings.
That said, tax planning and financial planning are closely linked, as taxes are a constant, life-long expense item that can be managed to your benefit and converted into new found dollars that can help build your wealth.
Given that the financial planner’s role is principally focused on risk management and growing assets through investment management, many choose to work closely with proactively trained tax planners to make sure that every tax benefit possible is found for their clients. Simpler strategies like timing the sale of securities to keep their appreciated value characterized as a long-term gain are handled by the financial planners. The more complex challenges like solving the tax issues and maximizing gain when selling a business or real estate is managed by the tax planner. Working together, they can unlock every dollar of tax benefit available to you.
The Tax Planner Complements Other Financial Planners
Catching and planning for tax-beneficial opportunities is the core expertise of the tax planner. Seeking tax advice from a qualified proactive tax planner before pulling the trigger on significant transactions makes good business sense and can result in tens of thousands of dollars or more in taxes being legally reduced, deferred and sometimes even eliminated entirely. It is well worth you investigating the possibilities.