To avoid facing a surprise tax bill and preserve wealth, taxpayers can engage in strategic tax planning. It’s an effective way to support short and long-term financial goals and minimize tax liabilities in the meantime.
So, what does tax planning for individuals entail, and what are some of the strategies that are used? Continue reading through this guide as we discuss these strategies in further detail.
What is tax planning?
Tax planning is a strategy that financial planners, tax accountants, or wealth management professionals implement to help payers minimize their tax liability.
It’s a key aspect of overall financial planning, ensuring the client’s investment portfolio and transactions are optimized to protect their wealth.
Tax planning is not about getting the payer’s tax bill to $0 every year, nor is it only reserved for ultra-high-net-worth individuals. Rather, it’s a long-term strategy that’s meant to lower the payer’s lifetime tax liability.
It requires a solid understanding of the client’s current financial standing. From there, professionals strategically time income, expenses, and investments and maximize credits and deductions where possible to reduce their tax bill and support their financial plan.
Example of tax planning strategies
Firms working with wealth management clients often implement a few key strategies in the tax planning process.
Retirement savings
Contributing to tax-advantaged retirement accounts each year is a critical tax planning strategy. Plans like traditional IRAs or 401(k)s offer the dual benefit of helping the individual save up for their retirement, while also working to lower their taxable income in the current tax year.
Another strategy is to contribute to a plan like a Roth IRA, which doesn’t reduce taxable income in the current period; however, the account holder gets the benefit of not paying taxes on qualified distributions during retirement.
Maximizing deductions and credits
When filing their federal tax returns, payers must choose between taking the standard deduction or itemizing deductions instead.
It’s typically up to payers to decide which option to take. However, it’s recommended to choose the one that results in the largest deduction, thereby lowering their taxable income by the greater amount.
For many, choosing the standard deduction is the right option, though there are some individuals who could benefit from itemizing expenses. For example, in the 2025 tax year, the standard deduction for a single taxpayer is $15,000. Thus, it only makes sense to itemize deductions if the payer incurred qualifying expenses in the year that will total above this amount.
There are also plenty of available credits that taxpayers may be eligible for. Instead of reducing their taxable income (like deductions), credits directly reduce the amount of tax that’s owed. Common credits individuals may qualify for include the child and dependent care credit, child tax credit, and American Opportunity Credit.
Choosing the right business structure
For those who are self-employed, choosing the right legal entity for their business is another key component of strategic tax planning for individuals.
More specifically, to avoid incurring self-employment taxes, it may be worth setting up the business as an S-corporation instead of a sole proprietorship or limited liability company (LLC).
While not changing much operationally about the business, this can result in significant tax savings each year.
Understanding tax brackets
Tax brackets directly affect the payer’s overall tax liability. The progressive tax system in the United States means that payers are taxed more as their income goes up.
However, it’s important to note that these higher rates don’t apply to their entire income, only the portion they’ve earned within the higher tax bracket.
The IRS releases tax rates for the coming year or so ahead of time. Thus, it can be helpful for payers to project their income for the coming year to determine which bracket they will fall into, aiding their tax planning and optimization efforts.
Year-end tax planning and optimization tips
There are several things payers can do before the end of each year to lower their taxable income and overall tax burden. This includes:
Defer income
If possible, individuals can try to defer income payments to the new tax year if it will put them in a lower tax bracket.
Again, this would only affect the portion of the income that sits above the tax bracket threshold. However, doing so can help lower their total tax liability for the year, so it may be worth it if there’s some flexibility.
For example, let’s say there’s a small business owner who has just finished work for a client at the end of December. If they expect the payment to put them into a higher tax bracket, they may be able to put off sending the invoice to the client and collecting the payment until after the first of the year.
Make a charitable contribution
Before the year ends, individuals can make a charitable contribution to get a deduction. Taxpayers will get the greatest benefit here if they’re already itemizing deductions, as each additional qualifying expense will help reduce taxable income even further.
But, if the individual is claiming the standard deduction, and the charitable contribution won’t put them over this limit, the donation won’t necessarily offer a tax advantage. This isn’t to discourage charitable donations, but clarify the potential impact it has on an individual’s tax burden.
Sell losing investments
Another helpful strategy is to sell off losing investments before the year ends to offset realized gains.
This strategy is also referred to as “loss harvesting,” and may be helpful to avoid or reduce the amount of short-term capital gains earned in the year, which are often taxed at a higher rate than standard income.
Max out retirement contributions
Contributing any amount of money to retirement plans like a traditional IRA or 401(k) is generally beneficial from a tax savings perspective.
However, it’s typically recommended that those who have the available capital should max out their contributions to the annual limit. This will allow them to get the greatest tax advantage.
In 2024, the maximum total contributions to traditional and Roth IRAs was $7,000 for those 49 or younger. Individuals who are 50 or older can contribute up to $8,000.
Record keeping for tax planning
Reduce stress and last-minute scrambling during tax season by staying well-organized throughout the year. This includes keeping the books up-to-date for small business owners and maintaining accurate records of all income and expenses.
Individuals should hold onto essential tax documents like any W-2s, 1099s, and other forms pertaining to transactions or payments made during the tax year.
Payers can store physical copies of these documents in filing cabinets or filing folders at home or in their office. In the digital age, it’s often more convenient to maintain digital records and copies of such documents.
Using a cloud file storage application ensures that the taxpayer’s sensitive information is kept private and also allows them to access the documents from nearly anywhere. These apps reduce the risk of misplacing or losing key tax documents, which can create delays during the tax filing process.
When to consult a tax professional
Certain tax planning strategies can be done without professional guidance or expertise, like waiting to send a client their invoice until the new year or making a charitable donation.
That being said, there are clear benefits to working with a tax advisor, especially for those with more complex financial situations or minimal knowledge and experience about tax accounting.
It’s no secret that tax-related topics can be intimidating. They can be tricky to navigate without the proper guidance, and may even result in costly mistakes.
Experienced tax planning professionals provide peace of mind that the taxpayer is making strategic decisions and investment timing to support long-term financial goals. They can help taxpayers implement comprehensive tax planning strategies that support both short-term and long-term financial goals, while ensuring compliance with tax laws and regulations.
So, when should someone hire a tax professional? Here are some of the common scenarios when it can be useful:
- Individuals who own or run a small business
- Those who own and manage a rental property
- Professionals who don’t have time or knowledge to handle tax accounting matters
- People who are anticipating a major life change (having a child, nearing retirement, getting married, etc.)
- If someone owes back taxes
- A business owner or individual who is being audited
How to choose a tax planning professional
Each person has their own unique financial needs and preferences regarding who they hire to manage their finances. Even still, the following criteria can help individuals find and vet expert tax professionals:
- Industry expertise. Where applicable, look for professionals who have specific experience in the relevant industry or client type.
- Reputation. Look at the professional’s online reviews or past client testimonials to verify that they’re a reliable service provider.
- Offered services. See if the provider offers tailored services to each person’s unique needs and circumstances, or if they offer fixed plans or tiered services.
- Pricing. No matter the budget, it can be useful to clarify how the professional charges for their services (i.e., hourly, fixed rate, retainer) to avoid a surprise bill down the road.
Increase practice efficiency with BILL
Tax advisors, financial planners, and wealth management professionals supporting clients with tax planning services may require some additional support of their own.
Specifically, when it comes to managing bill pay for clients, BILL’s wealth management platform can help improve client convenience, strengthen privacy, and streamline payments.
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Frequently Asked Questions
What does tax planning and optimization include?
Tax planning and optimization include taking advantage of the existing tax codes to help individuals minimize their tax bills and preserve their wealth over the long term. In this way, it contributes to financial planning and may involve strategic retirement contributions, income timing, business structuring, and charitable contributions.
Is tax planning worth it?
Each individual and family may have their own financial needs and goals. However, tax planning can be worth it to pay the least amount of taxes as possible, while also contributing to long-term financial targets like retirement savings.
