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What is Tax Planning Anyway?

By: Terry Roe
Published in Articles on March 06, 2022

Tax planning is financial planning for tax efficiency. Early in my career, in simpler times , tax planning was often thought of as simply deferring income and accelerating deductions at year end. Some st ill have, what I consider, this short-term view. They think successful tax planning is paying the lowest tax legally possible for a given year. In today’s complex world, this short-term view can prove to be very costly to accomplishing your long-term financial planning goals.

Before sharing tax planning strategies, let me provide a few basic tax facts:

  1. Currently, ordinary income (wages, interest, etc.) is taxed at 10%, 12%, 22%, 24%, 32%, 35%, or 37%. If you are married or single, these tax rates begin at differing dollar amounts. To help you understand how the tax brackets work, let me assume that you are married. The first $19,900 of taxable income is taxed at 10%. Taxable income from $19,901 to $81,050 is taxed at 12%. Therefore, if your total taxable income is $81,050, your income tax liability would be $9,328. Your marginal tax rate is 12% but your effective tax rate is 11.5% because you still benefit from having the first $19,900 taxed at 10%.
  2. Currently, capital gains income (investments, qualified dividends, etc.) is taxed at 0%, 15%, or 20%. Please note that is not a typographical error. Some capital gains income is potentially taxed at 0%. This can be a valuable tool when rebalancing your investment portfolio.
  3. Every taxpayer gets to deduct either a standard deduction or itemized deductions (property taxes, mortgage interest, charitable contributions, etc.) from their total income to calculate the taxable income to which the above tax rates apply. The standard deduction depends on if you are married or single, and other fa ctors. The standard deduction for a married couple in 2021 is $25,100 (unless you’re over 65 or blind). Therefore, a married couple with $25,000 in total income would have negative taxable income of ($100), and not owe any income tax.

With that backdrop, I believe, as a general rule, the best tax planning is done by trying to smooth your taxable income for the foreseeable future—so you can avoid bouncing between tax rates.

Obviously, I am oversimplifying a difficult process, and many other factors come into play when trying to smooth taxable income. The most important take away is understanding that the goal of only paying the lowest tax possible this year may not be in your long-term financial best interest. Be sure to also keep in mind that the tax rates are currently scheduled to increase after 2025 when most of the current tax law provisions expire.

As you go forward attempting to smooth your taxable income for the foreseeable future, consider these tax planning strategies:

  1. Current year retirement contributions to your Roth 401(k) or IRAs versus Traditional 401(k) or IRAs.
  2. Convert pre-tax IRAs to Roth IRAs.
  3. Contribute to “back door” Roth IRAs.
  4. Take additional IRA distributions in the current year to provide cash flow for future cash needs.
  5. Alternate between the standard deduction and itemized deductions by “bunching” two years’ worth of itemized deductions into one year, when possible.
  6. Make charitable donations with appreciated property or qualified charitable donations from retirement accounts.
  7. Take advantage of health savings accounts, flexible savings accounts, and dependent care flexible spending accounts.
  8. Review estate planning documents and strategies.

Obviously, these are just a few of the strategies that might be beneficial; every taxpayer’s situation is different. While it is easy to make assumptions and apply cookie cutter solutions, the correct answer for each taxpayer should be customized to what will work for them. Moreover , tax planning is not a static event. You don’t sit down and create a plan and then never have to do any additional work. Tax laws are constantly changing, and your income and deductions rarely stay the same.

I have been a CPA offering tax planning and tax compliance services for over thirty years, and I am familiar with the tax rates that have been in place for that period of time. Currently, for most taxpayers the tax rates are historically low. In today’s economic environment where Congress continues to spend money like drunken sailors and create an ever-larger government debt burden, I believe that future tax rate increases are inevitable, and that tax planning (and long-term tax strategies) offer significant tax savings and benefits. I would encourage you to invest time in planning and creating a tax strategy, so you can enjoy the benefits.

Terry L. Roe is a financial advisor with Onyx Financial Advisors, LLC, an independent fee-only registered investment advisory firm located in Idaho Falls, Idaho. He can be reached at (208)522-6400 or

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