What Are Tax Planning Services and How Can They Help You?

Tax planning services involve a proactive approach to managing financial activities to optimize tax position. This forward-looking strategy aims to reduce tax liabilities, maximize after-tax income, and achieve financial goals within current tax laws. Rather than simply reporting past financial events, tax planning involves making informed decisions throughout the year to influence future tax outcomes.

Core Areas of Tax Planning

Tax planning encompasses various aspects of financial life, each offering opportunities to manage tax burdens.

Income Tax Planning

Income tax planning involves strategies to minimize the amount of income subject to taxation. This can include utilizing available deductions, such as the standard deduction, which for 2024 is $14,600 for single filers and $29,200 for married couples filing jointly. Taxpayers may also itemize deductions like mortgage interest or charitable contributions if these exceed the standard deduction amount. Credits, such as the Child Tax Credit, which can be up to $2,000 per qualifying child for 2024, can directly reduce tax owed.

Investment Tax Planning

Investment tax planning focuses on how investment decisions impact tax liabilities. Profits from selling assets, known as capital gains, are taxed differently depending on how long the asset was held. Short-term capital gains, from assets held for one year or less, are taxed at ordinary income tax rates, which can range from 10% to 37% for 2024. Conversely, long-term capital gains, from assets held over a year, receive lower rates of 0%, 15%, or 20% for 2024, depending on income level. Strategies like tax-loss harvesting, which involves selling investments at a loss to offset capital gains, are part of this area.

Retirement Tax Planning

Retirement tax planning involves structuring contributions and withdrawals from retirement accounts to minimize taxes over an individual’s lifetime. Contributions to traditional retirement accounts, such as a 401(k) or traditional IRA, are tax-deductible in the year they are made, reducing current taxable income. For 2024, individuals can contribute up to $23,000 to a 401(k) and an additional $7,500 if aged 50 or older. IRA contributions are limited to $7,000 for those under 50 and $8,000 for those 50 or older in 2024. Required Minimum Distributions (RMDs) from these accounts begin at age 73 and are taxed as ordinary income.

Estate and Gift Tax Planning

Estate and gift tax planning focuses on minimizing taxes on the transfer of wealth, both during one’s lifetime and at death. For 2024, individuals can gift up to $18,000 per recipient annually without it counting against their lifetime gift tax exemption or incurring gift tax. The federal lifetime gift and estate tax exemption is $13.61 million per individual for 2024, meaning transfers above the annual exclusion are applied against this lifetime amount before any tax is due. This exemption is currently scheduled to revert to lower levels after 2025.

Small Business Tax Planning

Small business tax planning addresses the unique tax considerations for business owners. This includes choosing the most tax-efficient business structure. Owners of pass-through entities may be eligible for the Qualified Business Income (QBI) deduction, allowing a deduction of up to 20% of qualified business income. This deduction is available even if the taxpayer takes the standard deduction, but it is subject to income limitations and other rules.

Professionals Who Provide Tax Planning Services

Various professionals offer tax planning services, each bringing a distinct set of skills and expertise.

Certified Public Accountants (CPAs)

Certified Public Accountants (CPAs) are licensed professionals with extensive knowledge of tax law, accounting principles, and financial reporting. They assist individuals and businesses with tax compliance, preparing tax returns, and offering advice on tax-efficient financial strategies. CPAs can identify deductions, credits, and other opportunities to reduce tax liabilities.

Financial Advisors

Financial advisors, particularly those with a Certified Financial Planner (CFP) designation, provide comprehensive financial planning that integrates tax considerations. These advisors help clients develop long-term financial strategies encompassing various financial areas, while optimizing tax outcomes. They collaborate with other tax specialists for complex situations.

Tax Attorneys

Tax attorneys specialize in the legal interpretation of tax law and represent clients in intricate tax matters, including audits, appeals, and tax litigation with the IRS. Their expertise is valuable for complex transactions, business structuring, or when navigating disputes with tax authorities. They can provide legal opinions on the tax implications of various financial arrangements.

Enrolled Agents (EAs)

Enrolled Agents (EAs) are federally licensed tax practitioners authorized to represent taxpayers before the IRS. They specialize exclusively in taxation and can handle a wide range of tax issues, including tax preparation, audits, collections, and appeals. EAs are a suitable choice for individuals and small businesses seeking dedicated tax expertise and representation.

When to Consider Tax Planning Services

Engaging in tax planning is beneficial during specific life events or financial changes that can impact one’s tax situation.

Change in Income

A significant change in income, whether due to a new job, a promotion, or starting a business, warrants a review of tax strategies. Such changes can push an individual into a different tax bracket, necessitating adjustments to withholding or exploring new deductions.

Major Asset Transactions

Major asset transactions, such as buying or selling a home, real estate, or a business, have significant tax implications. These events can involve capital gains or losses, and understanding the tax consequences in advance allows for strategic timing and structuring of the transaction to minimize tax impact.

Life Events

Life events like marriage or divorce also trigger the need for tax planning. Marriage affects filing status and eligibility for credits and deductions. Divorce requires careful consideration of asset division, alimony, and child support for tax purposes. The birth or adoption of a child introduces new tax benefits, which requires planning to maximize.

Approaching Retirement

Approaching retirement is another important time for tax planning, as individuals transition from accumulating assets to drawing income. Strategies for Required Minimum Distributions (RMDs) from retirement accounts become important, as these are taxable. Planning for the taxation of Social Security benefits and other retirement income sources helps ensure financial stability in later years. Receiving a large inheritance or gifts also calls for tax planning to understand any estate or gift tax implications.

Tax Planning Versus Tax Preparation

A common point of confusion is the distinction between tax planning and tax preparation, two distinct services.

Tax Preparation

Tax preparation is a backward-looking process that involves compiling and reporting historical financial information to calculate the tax liability or refund for a completed tax year. This service occurs annually, before the April 15 filing deadline. It focuses on ensuring accurate compliance with tax laws based on past financial activities.

Tax Planning

Tax planning, in contrast, is a proactive and forward-looking endeavor. It involves making strategic financial decisions throughout the current year to influence and optimize future tax outcomes. The goal is to legally reduce the amount of tax owed by taking advantage of deductions, credits, and favorable tax treatments before the tax year ends. This involves ongoing analysis and adjustments to financial strategies based on anticipated income, expenses, and life events.

Comparison

While tax preparation is about reporting what has already happened, tax planning is about shaping what will happen. For example, tax preparation might involve reporting charitable donations made in the past year to claim a deduction. Tax planning would involve advising on the most tax-efficient ways to make future charitable contributions to maximize tax benefits. The scope of tax preparation is limited to accurate reporting, whereas tax planning extends to strategic financial management.