Why Start Tax Planning (and Preparation) Early?

Taxes are a part of life, and planning for them early can make a significant difference. This article is part of a series that tackles your most pressing tax questions. Part 1 focuses on the benefits of starting tax planning and preparation early in the year. Taxes aren’t just a springtime chore; with a proactive approach, you can optimize them for long-term savings.

What’s the Difference Between Tax Planning and Tax Preparation?

There’s a big difference between tax planning and tax preparation. Tax preparation is the annual process of filing a return with the IRS and is something everyone must do. Tax planning, however, is a year-round process that can help you optimize your overall tax situation. Let’s take a closer look at each.

Tax Planning

Tax planning is a holistic approach that highlights both short-term and long-term strategies to reduce your total tax liability and keep more money working for you. It allows you to evaluate the long-term tax impact of specific decisions. For example, a Roth conversion may trigger a tax liability in the short term, but the long-term benefits of tax-free growth and withdrawals can outweigh the immediate cost. Tax planning also allows you to approach several financial decisions from a tax perspective, including:

• Exercising, selling, and/or holding your stock options

• Long-term investing in an HSA

• Roth conversions

• Charitable giving, Donor Advised Funds (DAFs), and Qualified Charitable Distributions (QCDs)

• Asset location

• Retirement withdrawal strategies, and more.

While taxes aren’t the only factor in financial decisions, understanding potential tax impacts can add depth to your planning.

Tax Preparation

Tax preparation is the process of filing income tax returns with federal and state governments. While necessary, it is largely reactive. Once the calendar year begins, there are fewer opportunities to influence your current-year tax outcome. However, you may still take some actions, such as contributing to an IRA or HSA before the annual tax deadline. These moves can reduce taxable income and boost savings. Many more strategic opportunities exist before year-end to shape your tax picture for the coming season.

The Benefits of Tax Planning Early in the Year

Starting tax planning early provides more time to explore opportunities and create a solid plan. By revisiting your plan quarterly, you can make informed decisions and adjust as needed. Some questions to consider:

• Is your company going public this year?

• What sort of equity compensation do you have this year? Are any shares vesting soon?

• Does a Roth Conversion make sense this year?

• Can you optimize your charitable giving strategy with a DAF, bunching donations, donating appreciated assets, etc.?

• Should you strategically realize some capital gains?

• Are you starting the 5-year retirement clock?

• Do you have any new income sources?

Monitoring income and taxable events throughout the year allows you to deploy tax-saving strategies and make more informed financial decisions.

Why File Your Tax Return Early

Filing early helps avoid the tax-season rush and gives you and your CPA or tax professional more time to ensure accuracy. It can prevent the need for amended returns, extensions, or penalties, and it also helps protect against identity theft. Filing early can also speed up access to any refunds.

Make A Long-Term Tax Plan That Works For You

Taxes will always be part of your financial picture, so working with a professional can help you chart the best path forward. Proactive tax planning is fundamental to long-term financial success. Creating a comprehensive strategy ensures you are positioned to take advantage of opportunities and avoid unnecessary liabilities. Reach out today.