PlanWise today by discovering why smart tax planning isn’t just about reducing your next bill—it’s about looking years ahead to uncover opportunities that can strengthen your financial future.
Tax planning: beyond april 15
Tax planning is one of my favorite parts of financial planning.
At its core, tax planning isn’t about loopholes or trickery. It’s about understanding the rules as they are written, and using them wisely to reduce your lifetime tax bill. It’s 100% legal, and incredibly powerful. (Tax evasion is not—just to be clear!)
I love discovering ways to help clients minimize their taxes, and love showing others how to do the same.
When I speak to groups, I often ask what comes to mind when they think of tax planning. The responses usually focus on:
- Reducing taxes on their current tax filing.
- Techniques to “skillfully” prepare their tax returns.
Let’s clear something up: filing your return isn’t tax planning. It’s just reporting what already happened. It’s history. And once it’s history, the door to strategy has already closed.
True tax planning looks ahead. The further ahead you look, the more opportunities you’ll find.
Think of tax planning in two tiers.
Tier 1 Tax Planning: A Strategy for Year-End Savings
Tier 1 planning is like a tune-up before winter. It should ideally take place in the fall, but before the end of the year, to allow enough time for adjustments.
It starts with a tax projection—a forward-looking snapshot of your expected income, deductions, and credits, which provides insight into your tax liability for the year. It’s a bit of work to gather the estimates needed, but the insights can be well worth it.
When I work with clients, here are four key areas I always explore:
- Can we increase contributions to tax-advantaged accounts like 401(k)s, IRAs, or HSAs?
- Should we convert some traditional IRA dollars to Roth—especially in a low-income year?
- Are there capital gains we can realize tax-free by staying within the 0% capital gains bracket?
4. Do we have capital losses that could offset gains or even ordinary income?
If you don’t understand any of the above, keep reading…
tier 2 Tax Planning: The Long Game
Tier 2 planning is where the magic really happens… because between ages 55 and 70, your tax landscape starts to shift.
You might retire, start Social Security, tap pensions, take deferred comp payouts, or begin drawing from retirement accounts. If you’re married, your spouse might hit those milestones at different times.
This is the moment to zoom out and look at your whole financial picture.
It’s not just about the next year—it’s about the next twenty.
Because when life changes, your tax picture changes too—and that’s when opportunity knocks.
While I can’t cover every detail in this lesson, I want to highlight some important “tax planning triggers” to watch out for. Then, we’ll talk about the tax treatment of different types of income.
Watch for Tax Planning Triggers
If nothing changes—your salary’s steady, same mortgage, same number of dependents—then it’s likely that your tax return will look similar to the previous year’s.
However, significant tax-saving opportunities often arise when things change. I refer to these as “Triggers.” When a Trigger occurs, it might be a great time to focus extra effort on your tax planning.
For example, you change jobs, or you have a year where you are only employed half the year, or you retire. During those years, you are likely to be in a lower tax bracket than you were the year before.
Some other common triggers include:
- A move to a new state
- Paying off or taking on a mortgage
- A new dependent
- Selling a home, rental, or business
- Receiving a large bonus or exercising stock options
In these years, your income can swing. And when income moves, tax opportunities open up.
How Tax Rates Work (and Why Timing Matters)
Here’s something many people don’t realize: not all your income is taxed the same.
Take Jen, for example. She’s single and has $90,000 in taxable income:
- Her first $11,925 is taxed at 10%
- The next $36,550 is taxed at 12%
- The last $41,525 is taxed at 22%
That last slice—her marginal rate—is where smart tax planning happens.
Let’s say Jen contributes $10,000 to her 401(k). That lowers her taxable income by $10,000, and she saves $2,200 in taxes at her 22% rate. Great, right?
But what if she’s early in her career, and likely to retire in a higher bracket—say 32%? That means she’d save at 22% now, only to pay at 32% later.
That short-term savings may come at a long-term cost.
That’s where tier 2 planning shines—helping you decide when to defer income and when to accelerate it.
Don’t let making a living prevent you from making a life.
Not All Income Is Taxed the Same: Know Your Buckets
In addition to considering the thresholds between tax rates, it’s important to remember that your income might come from many sources—but each is taxed differently. I group them into four buckets:
Bucket 1: Ordinary Income
This includes wages, IRA/401(k) withdrawals, pensions, and most interest.
It’s taxed at standard rates—up to 37%.
Bucket 2: Long-Term Capital Gains & Qualified Dividends
If you hold investments for over a year, you may qualify for lower rates: 0%, 15%, or 20%.
And yes, some investors pay zero taxes on their investment gains. By structuring your portfolio with taxes in mind, you can strategically plan to realize capital gains in years when your income is lower, taking advantage of the lower tax rates—or even the zero percent rate.
Bucket 3: Social Security
At least 15% is always tax-free. But the rest depends on your total income
If Social Security is your only income, it may be completely tax-free.
But add in pensions, traditional IRA withdrawals or investment income, and up to 85% of your benefit could be taxed.
Bucket 4: Tax-Free Income (Roth IRAs, Roth 401(k)s)
Roth IRAs and Roth 401(k)s are funded with after-tax dollars.
You don’t get a deduction today—but they grow tax-free. Your contributions and earnings can be withdrawn tax-free in retirement, if you’ve had the account for at least five years and are 59½ or older.
While the appeal of immediate tax benefits often outweighs future rewards, understanding the long-term advantages of a Roth account can help guide your strategy.
Why Roth Accounts Are Quietly Powerful
Roth accounts are a kind of hidden gem in the tax planning world.
They can help in four big ways:
- Reduce Social Security Taxation: Roth withdrawals do not count towards determining the taxability of your Social Security benefit.
- Lower Medicare Premiums: Your income affects your Medicare Part B costs. (Distributions from traditional IRAs, 401(k)s, and pensions count toward this income, but Roth distributions do not. Withdrawing a portion of your income from a Roth can help keep Medicare premiums low.)
- Shield Surviving Spouses: When one spouse passes away, the surviving spouse files as a single taxpayer, often pushing them into higher income tax brackets, and with half the deductions. Roth income can help keep them in a lower bracket.
- Minimize Required Minimum Distributions (RMDs): RMDs only apply to Traditional 401(k)s and IRAs – they do not apply to Roth. (see lesson 6 for more on RMDs)
A Roth conversion strategy can help you minimize RMDs and potentially lower your tax liability in retirement.
We’ve covered how tax brackets work, how to spot tax planning triggers, how different income types are taxed, and why Roths can be such a valuable tool.
With the right type of planning, many people can keep more of their money, and pay less taxes, but you must engage in intentional tax planning to uncover these opportunities.
