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Financial LiteracyInsights
The Importance of Tax Planning in Your Financial Plan
06.16.25
Although it’s common to focus on saving and investing, tax planning is a crucial part of your finances that should never be overlooked. Applying effective tax strategies can help you secure financial wellness and meet your short and long-term goals.
In its simplest form, tax planning involves analyzing your financial plan to ensure it is optimized to reduce your overall tax liability. This involves being intentional about income, expenses, and investments, maximizing your tax deductions and credits, and employing other strategies to help preserve your wealth.
Key Considerations in Tax Planning
Timing Your Income
If you have the flexibility and anticipate moving into a lower tax bracket, you can defer some of your income (or bonus) to the next year to help reduce your tax bill. Income splitting may also be an option if you can transfer funds to a family member in a lower tax bracket.
Planning for Expenditures & Major Life Events
Planning for major expenditures (education, medical costs, charitable donations) and life events (marriage, children, retirement) is essential. Doing so can enable you to mitigate adverse tax effects and take advantage of benefits such as tax deductions and credits to help reduce your taxable income.
Placing Investments Strategically
Investments that yield less returns to taxes are typically better suited for taxable accounts, such as brokerage accounts. This is especially effective if you plan on holding your investments for over a year, which can offer a more favorable capital gains tax rate. Investments that aren’t tax-efficient should typically be placed in tax-exempt or tax-advantaged accounts like IRAs, 401(k)s or HSAs.
Tax Planning Strategies
Tax Gain-Loss Harvesting
Tax gain-loss harvesting involves selling securities in your investment portfolio at a loss to offset any capital gains taxes owed from selling profitable assets. This strategy is typically used to limit short-term capital gains—usually taxed at a higher rate—and reduce overall taxes.
Saving for Retirement
Investing in tax-advantaged accounts can be an effective strategy to save money for your retirement and reduce your overall tax burden.
There are several types of plans to consider:
401(k): You can transfer a percentage of your paycheck directly into these employer-sponsored plans (and take advantage of matching if available) to reduce your taxable income for the current year. Taxes are then collected when you withdraw funds in retirement.
Traditional IRA: You can deduct annual contributions to these tax-deferred accounts if you meet specific IRS criteria. You will owe taxes when you withdraw your investment.
Roth IRA: You cannot deduct contributions to these after-tax retirement accounts, but qualified distributions will not be taxed when you retire.
Tax Deductions and Credits
As mentioned above, taking full advantage of your eligible tax deductions and credits is essential. Depending on your specific financial situation, taking the standard deduction or itemizing your deductions may be more beneficial. If you have children or other dependents, pay for college tuition, or have invested in energy efficiency for your home, you may be eligible for tax credits.
Tax planning is not simply about saving money. By combining tax planning with your overall financial plan, you can focus on striving for peace of mind and a prosperous financial future. MAI can provide objective advice and help ensure that your financial plan includes appropriate tax-planning strategies to meet your goals for today and tomorrow. Reach out to MAI to learn more about how we can help empower you to simplify, protect and grow wealth.
This is for informational purposes only. The opinions and analyses expressed herein are subject to change at any time. Any suggestions contained herein are general, and do not take into account an individual’s or entity’s specific circumstances or applicable governing law, which may vary from jurisdiction to jurisdiction and be subject to change. Distribution hereof does not constitute legal, tax, accounting, investment, or other professional advice. Recipients should consult their professional advisors prior to acting on the information set forth herein. In accordance with certain Treasury Regulations, we inform you that any federal tax conclusions set forth in this communication, were not intended or written to be used, and cannot be used by any taxpayer, for the purposes of avoiding penalties that may be imposed by the Internal Revenue Service.
