The wealthier a family is, the more it will benefit from a lower tax rate. It’s also true that every family paying taxes will benefit from paying less of them. Another way of saying it is, the less a family pays in taxes, the more financially liberated that family will be. Since legal maneuvering aimed at minimizing lifetime taxes can produce meaningful long-term savings, let’s differentiate between tax preparation, tax planning, and tax management in hopes we may benefit from each.
Tax preparation involves gathering financial information, calculating tax liabilities, and filing required tax returns accurately with government authorities while avoiding penalties and errors. It is a retrospective process aimed at settling a past tax bill with the IRS, and though it costs money, it’s primary purpose is compliance rather than tax reduction.
Tax planning is the strategic process of arranging financial activities to maximize lifetime after-tax income and minimize taxes on the distribution of the remaining estate to heirs. Notice this does not resemble the rote minimization of taxes every year, but does include building a retirement income plan, positioning assets tax-efficiently, identifying tax-efficient withdrawal strategies, and creating a program for future tax outcomes. It is forward-looking, strategic, and when done well, can result in significant tax savings when implemented properly.
Tax management is the ongoing process of implementing and monitoring the tax plan while adjusting for personal financial developments and changes in tax policies and regulations. It is action-oriented and includes routine “what-if” analyses, year-round management of tax opportunities, and the integration of tax, investment, insurance, retirement income planning and estate planning decisions into one coordinated process.
While tax preparation and proper filing are required, they generally offer fewer tax-saving opportunities than proactive tax planning. Building a tax plan is a worthy endeavor, but absent implementation, it doesn’t reduce taxes. Consider whether the careful ongoing management of well-laid tax plans might benefit you and your family, and may God bless your planning efforts! Shaun
“Render to Caesar the things that are Caesar’s, and to God the things that are God’s” ~Matthew 22:21
“Never waste a low tax bracket with short-term thinking!” ~Ed Slott
“Your IRA is an IOU to the IRS” ~Ed Slott
“Tax preparation costs you money; tax planning makes you money” ~Ed Slott
Disclosure(s)
This material is provided for informational and educational purposes only and is not intended to provide tax, legal, accounting, or investment advice. The information presented is general in nature and may not apply to your specific circumstances. Tax laws, regulations, and interpretations are subject to change, and their application may vary depending on individual facts and circumstances. You should consult with your qualified tax, legal, and financial professionals before implementing any tax planning strategy or making financial decisions.
Tax planning strategies are not guaranteed to reduce taxes or produce specific financial outcomes. Any references to potential tax benefits or strategies are for illustrative purposes only and do not represent a promise or prediction of results. Individual outcomes will vary based on personal circumstances, changes in tax laws, and other factors.
Old Forge Wealth Management, LLC is a registered investment adviser. Registration does not imply a certain level of skill or training.