Essential Tax Planning Strategies

Reducing your tax burden isn’t just about what you report each April—it’s about the decisions you make all year long. When income is high and financial complexity increases, a proactive tax strategy becomes one of the most powerful tools for building and preserving wealth over time.

Understanding Tax Planning

At its core, tax planning is the process of analyzing your financial situation to ensure tax efficiency. The goal is not to evade taxes, but to structure your affairs in a way that minimizes your legal tax liability. This involves taking advantage of available deductions, credits, income timing, and entity structures.

Tax planning isn’t just something to think about during filing season. It should be a year-round activity that adjusts as your income, investments, and goals evolve.

Importance of Tax Planning for Individuals and Businesses

For individuals, tax planning ensures that income is managed efficiently, retirement savings are maximized, and taxes aren’t eroding wealth unnecessarily. For business owners, strategic tax planning can significantly impact profitability, cash flow, and business valuation.

High earners often find themselves in higher tax brackets, facing more complex rules and fewer off-the-shelf solutions. Proactive tax planning helps navigate these complexities.

Key Tax Planning Strategies for Individuals

Individual taxpayers can implement a variety of strategies to optimize their tax outcomes. Some of the most effective include:

1. Retirement Account Contributions: Participating in your employer retirement plan and determining if contributing pre or post tax is most efficient for you.
2. Harvesting Capital Losses: Selling investments at a loss to offset gains can reduce capital gains tax and even carry forward into future years.
3. Roth Conversions: Converting traditional IRA assets into a Roth IRA can be powerful when executed during lower-income years.
4. Charitable Giving: Donating appreciated securities instead of cash can provide both a charitable deduction and avoidance of capital gains.  Using Qualified Charitable Distributions from IRAs can keep your income lower.  Also, the use of Donor Advised Funds to maximize your deductions in higher income years can have a significant impact on tax outcomes.

Tax Planning Strategies for Small Business Owners

Business owners have access to additional planning tools that can make a substantial difference in their after-tax income.

1. Entity Structure Optimization: Choosing the right entity—S corporation, LLC, or C corporation—can affect how income is taxed and what deductions are available.
2. Owner Compensation Planning: Balancing salary versus distributions in an S corporation can reduce payroll taxes and increase tax efficiency.
3. Section 199A Deduction: This allows eligible business owners to deduct up to 20% of qualified business income (QBI), but it comes with complex limitations based on income and profession.
4. Retirement Plan Contributions: Establishing a SEP IRA, Solo 401(k), or other defined contribution plan can provide large current-year deductions while building retirement wealth.
5. Business Expense Deductions: Accurate tracking of legitimate business expenses—from home office use to professional services—is essential to reducing taxable income.

Utilizing Tax-Advantaged Accounts

One of the most straightforward ways to reduce taxable income is through contributions to tax-advantaged accounts.

Retirement Accounts: Contributions to 401(k)s, 403(b)s, IRAs, and defined benefit plans can reduce taxable income in the current year. For high-income earners, backdoor Roth IRAs and mega backdoor Roth 401(k)s are strategies worth exploring.

Health Savings Accounts (HSAs): HSAs offer triple tax advantages: contributions are tax-deductible, growth is tax-free, and withdrawals are tax-free when used for qualified medical expenses.

529 Plans: While not deductible at the federal level, 529 plan contributions can grow tax-free and may qualify for state tax deductions, particularly useful for families planning for future education expenses.

The Role of Deductions and Credits in Tax Planning

Deductions reduce the amount of income subject to tax, while credits directly reduce your tax bill. High-income earners should understand the nuances of both.

Itemized vs. Standard Deductions: While the standard deduction is generous, those with significant mortgage interest, state and local taxes, or charitable contributions may benefit from itemizing.

Common Tax Credits: These include the Child Tax Credit, education credits, and energy-efficient home improvement credits. However, many credits phase out at higher income levels, so strategic timing is essential.

Timing Your Income and Expenses

The timing of income and expenses can make a significant difference in tax liability, especially for those who are self-employed or run a business.

Deferring Income: Postponing income to the next tax year can make sense if you expect to be in a lower tax bracket. This is often used by consultants, solo practitioners, and other professionals with flexible billing.

Accelerating Expenses: Bringing forward deductible expenses, such as equipment purchases or charitable donations, into the current year can lower your taxable income.

Year-End Planning: In the final quarter of the year, there are often opportunities to accelerate or defer strategically. This is when working with a financial advisor or tax professional becomes particularly valuable.

Estate and Gift Tax Planning Considerations

Tax planning isn’t only about income taxes. For high-net-worth individuals, estate and gift taxes can also pose a significant burden if not planned for appropriately.

Annual Gift Exclusion: Individuals can gift up to $19,000 per recipient in 2025 without triggering gift tax or using their lifetime exemption.

Lifetime Exemption: The federal estate and gift tax exemption is currently over $13 million per person, but this is set to sunset at the end of 2025. Keeping your planning up-to-date with changing laws is crucial.

Trust Strategies: Irrevocable trusts, GRATs, and SLATs can help reduce the size of a taxable estate while maintaining some control or access to assets.

Charitable Trusts: Vehicles like Charitable Remainder Trusts (CRTs) or Donor-Advised Funds (DAFs) can support philanthropic goals while also reducing estate and income taxes.

Common Tax Planning Mistakes to Avoid

Even with the best intentions, tax planning can go awry. Some common pitfalls include:

• Waiting until tax season to think about strategy.
• Failing to coordinate tax planning with overall financial planning.
• Ignoring the impact of changing tax laws.
• Not keeping accurate records of deductions and business expenses.
• Overlooking state and local tax implications, especially for those with multi-state income.

Tax planning should be proactive and integrated into your broader financial goals.

Conclusion: Taking Control of Your Tax Strategy

Whether you’re a busy physician, an entrepreneurial dentist, or a business owner wearing many hats, effective tax planning can help you retain more of what you earn and build lasting wealth.

It requires intentionality, regular reviews, and coordination with a team of professionals who understand your unique financial landscape.

At Tenet Wealth Partners, we work closely with clients in Illinois and across the country to implement tailored strategies that align with their life and business goals.

Reach out today to schedule a consultation and start building a smarter, more efficient tax strategy.

Registered Representative of Sanctuary Securities Inc. and Investment Advisor Representative of Sanctuary Advisors, LLC. Securities offered through Sanctuary Securities, Inc., Member FINRA, SIPC. Advisory services offered through Sanctuary Advisors, LLC., a SEC Registered Investment Advisor. Tenet Wealth Partners is a DBA of Sanctuary Securities, Inc. and Sanctuary Advisors, LLC.

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This material is provided for informational/educational purposes only. This material is not intended to constitute legal, tax, investment or financial advice. Tenet Wealth Partners does not offer tax advice and you should consult with a tax professional for your specific situation.  Investments are subject to risk, including but not limited to market and interest rate fluctuations.  

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