Written by Michael Joyce, CFA, CFP® and Elissa Wurf, PhD, CFP®, CPA

Lehigh Valley Business subscribers can read our article on this topic here


It’s Tax Prep Season, but You Should Be Focused on Tax Planning Year-Round

Tax planningWe are all aware that April 15th is coming — even if we might prefer to ignore that eventuality. While the first part of the year may have most of us focused on gathering documents, tax preparation and completing tax returns, we may not fully grasp the often-overlooked impact of tax planning on one’s long-term financial wellbeing. The implications can be especially significant for executives and other professionals with complex tax filings or sophisticated finances.


Difference between Tax Preparation and Tax Planning

Tax preparation is historical in nature, and a good tax preparer’s knowledge of current tax rules is very important. But fairly little can be done after December 31st each year to change a taxpayer’s financial picture. Tax planning, on the other hand, is forward-looking and takes into account the long-term tax consequences of financial decisions. Tax planning strategies identify ways to be proactive throughout the year (and beyond) to reduce future tax liabilities.


Discuss Big Financial Decisions with an Advisor

Any time you plan to make a big financial move — such as selling a valuable collectible, refinancing, allocating an inheritance or investing in cryptocurrencies — it is wise to first talk it through with a knowledgeable advisor. Many financial decisions can have negative tax-related consequences. Skillful tax planning can help you time the sale of a valuable collectible, for example, to reduce capital gains taxes and avoid penalties. A tax planner would also alert you to the fact that cryptocurrency investments now require more detailed reporting.


Avoid Potential Mistakes through Skillful Tax Planning

Our tax codes and other regulations have potential “traps” that can lead you to mistakenly pay more tax than required. An experienced tax planner can help avoid critical errors that are not remediable, and which incur large, immediate tax payments. Here are two common mistakes to avoid:

  • Adjusted Gross Income can impact Medicare premiums. There are “cliffs” in the amount of modified Adjusted Gross Income where receiving just $1 in additional taxable income will trigger larger Medicare premiums for an entire year.
  • Tax-related errors to avoid at retirement. Did you know that if the disbursement check from your employer’s retirement plan is made out to your name (rather than to the name of the new custodian “for benefit of” you) — and if that check is not deposited within 60 days to the new IRA account — you will be taxed on the entire retirement balance immediately?!


Tax Planning Strategies for Future Tax Brackets

The key to tax planning is not necessarily to lower taxes during the current tax year, but to take the long-term perspective and plan to lower taxes over your lifetime. Since we don’t know what future tax rates will be, there is always some risk, but we can attend to the probabilities. For example, the current low tax rates set for individuals by the Tax Cuts and Jobs Act are set to expire at the end of 2025. Even though Congress can act to change this, it is quite likely that future tax rates will be higher than current ones.


Therefore, it’s important to focus on the difference between current tax rates and unknown but expected future tax rates. The general principle is that if you are expecting your income and/or income tax rates to go up in the future, then you want to pay more tax now at lower rates, so you accelerate income and defer deductions. Conversely, if you are expecting your income and/or income tax rates to go down in the future, you want to pay less tax now and more in the future when the rates will be lower, so you defer income and accelerate deductions.


Taxes will never go away, but a tax planning strategy will help you take a long-term view over the course of your lifetime and not just focus on a given tax year.


For more about the services offered by Agili — in addition to tax planning — please see Financial Planning on our website.

Michael Joyce, CFA, CFP®, founder and president of Agili in Bethlehem and Richmond, VA is responsible for overall invest­ment strategy, management of investment portfo­lios and financial planning services. He can be reached at MJoyce@AgiliPersonalCFO.com.

Elissa Wurf, PhD, CFP®, CPA is a financial planning analyst at Agili in Bethlehem and Richmond, VA, responsible for developing and implementing comprehensive financial plans for clients. She earned her PhD in Psychology at the University of Michigan. A CERTIFIED FINANCIAL PLANNER and Certified Public Accountant, she can be reached at ewurf@joycepaynepartners.com.