Why Effective Tax Planning Strategies are a Critical Part of Wealth Management

Chad Holland |

As a successful person, you're no stranger to the complexities of managing your wealth.  But as you well know, accumulating assets and a strong cash flow is only half the battle; preserving it is equally important. One often overlooked area that can significantly impact your wealth is tax planning. Effective tax planning strategies are not just a good idea; they are a critical part of comprehensive wealth management.

Note: This article is intended to provide general information only. Always consult your tax professional for advice and specific recommendations.   


Why are Tax Planning Strategies Pivotal to your Wealth?


Tax planning is the art of arranging your financial affairs in a way that minimizes your tax liability. It's not about evasion or loopholes; it's about understanding the tax code and using it to your advantage. Unfortunately, many people pay more tax than they need to simply because they don't get enough planning. Effective tax planning can help you retain more of your hard-earned money, providing you with more capital to invest and grow your wealth.


For Best Results, Keep Planning Separate From Tax Preparation


It is common to think most about tax-saving strategies when you are having your tax return prepared. Here's the problem: that's when your tax advisor is likely under the most time pressure. There's little likelihood you're getting their full attention on ways to reduce your tax bill. As a result, there's a good likelihood you pay more tax every year than you need to. 

Instead, tax planning should be done at a different time than tax preparation. And it should be done regularly, as tax laws change which can open up new opportunities or require changes to current tax strategies.

At Holland Capital Management, we schedule tax planning reviews regularly with clients and their tax advisors.  This helps ensure you get enough attention to finding strategies to save as much tax as possible every year.


Tax Planning Strategies When Selling a Business


We recommend making time for tax planning every year, since any time we can reduce your income tax, that means more dollars freed up to help you build your savings. However, there are times when tax planning is even more important.  Anytime you're looking at selling a business or other highly valued asset, tax planning should be a critical focus. The way the sale is structured can have a significant impact on the amount of tax you'll owe. For example, selling the assets of the business rather than the stock can often offer more opportunities for tax deductions. Additionally, an installment sale, where payments are received over several years, can spread out the tax liability. So this can potentially place you in a lower tax bracket, lowering your total tax due.

Time is important, however. When tax planning starts early, you may have more opportunities to reduce your overall tax burden.


Tax Planning Strategies for Selling Highly Appreciated Real Estate


Maybe you own a piece of real estate that has risen significantly in value while you've owned it.  If you simply were to sell it, you'd likely owe a significant amount of capital gains taxes.  With some tax planning, however, property owners often find there may be strategies to defer or lower their tax burden.

At Holland Capital, we work closely with clients, their accountants, and our trust specialists to find potential strategies, which can include:

  • 1031 Exchange, which allows you to defer capital gains tax by reinvesting the proceeds of an investment property sale into a new property within 180 days.
  • Beneficiary Step-Up in Basis, which can be used in your estate planning. This strategy can allow heirs to receive a "step-up" in basis, which can reduce or eliminate capital gains tax after the death of the property owner.
  • Deferred or Installment Sale. This strategy occurs when you negotiate a payment plan with the buyer, spreading out the capital gains tax over several years.
  • Partial Donation to a Trust.  Another potential strategy involves donating all or part of a property to a Charitable Remainder Trust, which can provide you with a continuous income source and an immediate tax deduction.


Common Income Tax Planning Strategies


There are usually other tax planning strategies available depending upon your personal circumstances.  One good place to start might involve simply optimizing your retirement plan.  For example, you may be able to set up a new retirement account that will enable you to reduce your gross income by making pre-tax contributions.   That might be using an IRA or a Health Savings Account (HSA).  In that case you would switch from a traditional health insurance policy to a high deductible policy so you can start a tax-saving Health Savings Account.

Or, many common strategies start with searching for tax deductions that can enable you to reduce your adjusted gross income. Then, that can lower your tax bracket and reduce your income tax rate.

Those are just simple ideas to give you an idea of common starting points. Really, there is no shortage of available strategies since the country's tax code contains over 1,000,000 words spanning thousands of pages. The key is regular tax planning with a qualified team of specialists along with your tax advisor to help find ways to avoid paying more tax than you need to. 




What is the Difference Between Tax Deductions and Tax Credits?


A tax deduction reduces your taxable income, while a tax credit directly reduces the amount of tax you owe.  For example, if you're in the 35% tax bracket and have a $10,000 tax deduction, you can potentially save $3,500 in taxes. A $10,000 tax credit, on the other hand, would reduce your tax bill by the full $10,000. Both tax deductions and credits are valuable, of course, but taking advantage of a tax credit can often provide more savings.

Since tax credits are especially valuable, you should keep these in mind when preparing your taxes.  Some examples are the child tax credit, care tax credit, American opportunity tax credit, earned income tax credit, and for employers, the work opportunity tax credit.  (Please note that these were available as of the 2022 tax year but check for current availability.)  Of course, other credits exist, so please consult your tax advisor for details.


Why Should I Be Paying Attention to Tax Brackets?


When looking to lower your tax bill, paying attention to tax brackets is essential, but many people are not clear on how these brackets work. Let's take a minute to clear up the confusion. The United States has a progressive tax system, meaning the rate of tax you pay increases as your income does. Your income is taxed at different rates depending on how much you earn. These ranges of income are what we call "tax brackets." Each bracket has a specific tax rate associated with it. As your income increases, it moves through these brackets, and each portion is taxed at the corresponding rate.

Understanding your tax bracket can help you make better decisions about your income. For example, if you're on the cusp of moving into a higher tax bracket, you might decide to defer some of your income to the next tax year to avoid the higher rate. That way, that money will be taxed at a lower tax bracket next year. This is especially relevant for those who have control over when they receive income, such as business owners or professionals. Bottom line, if you're in a high tax bracket in general, you want your financial advisor focused on helping you find opportunities to stay in a lower one.

Also, keep in mind that two sets of tax brackets exist:

  • Federal tax brackets will determine your federal income tax and other tax amounts
  • State tax brackets that will determine your state tax liability

These two tax bracket structures may be very different, so be sure to be aware what applies to you. 


Do Tax Brackets Apply to Capital Gains?


Tax brackets also apply to capital gains, which are profits from the sale of assets like stocks or real estate. Long-term capital gains are usually taxed at a lower rate than ordinary income, but the rate still depends on your tax bracket. By understanding where you fall, you can better plan the timing of your asset sales to minimize your tax liability.


What is Income Deferral and How Can I Use It?


This is another valuable tax planning strategy that involves delaying the receipt of income to the next year to avoid it being classified in a high tax bracket. This can be particularly useful if you expect to be in a lower tax bracket in the future. For example, if you're nearing retirement, deferring income could result in significant tax savings.

This can be one of the most effective tax strategies once you are retired as well. Most retirees can exert a fair amount of control over their tax bracket in retirement by selecting where to draw income from during the tax year. For example, if you have a 401(k) retirement plan, a Roth IRA, and taxable savings, you can plan to take income in the most tax-efficient way possible to reduce what you owe at the end of the tax year.  


Income Shifting Strategy - High to Low Tax Bracket


Another interesting strategy is called income shifting, which involves moving income from a high-tax-bracket individual to a low-tax-bracket family member for tax purposes. For instance, you could gift assets that produce income to a child in college who is likely in a lower tax bracket. The income generated from these assets would then be taxed at the child's lower rate, reducing the overall family tax obligation.


What is an Example of a Tax Saving Strategy?


One classic example of a tax-saving strategy is investing in tax-efficient funds. These funds are designed to minimize capital gains distributions, thereby reducing your tax liability. Another example is taking advantage of tax-loss harvesting, where you sell losing investments to offset gains in other areas, effectively reducing your taxable income.  For best results, you'll likely want to immediately reinvest those funds in a similar (but not identical) investment.


What is the Difference Between Tax Planning and Tax Strategy?


While the terms are often used interchangeably, there is a subtle difference. Tax planning is a broader term that encompasses all the activities you undertake to minimize your tax liability. Tax strategy, on the other hand, refers to specific actions or investments made to achieve the goals set out in your tax planning.


What is the Difference Between Income and Capital Gains Taxes?


Income tax and capital gains tax are both forms of taxation, but they apply to different types of earnings. These are actually two different types of tax.  Income tax is levied on your regular earnings, such as wages, salaries, and interest income. Capital gains tax, on the other hand, applies to the profit you make from selling an asset like stocks, real estate, or other investments. The key difference lies in the source of the income and how it's taxed. Income tax rates are generally progressive and will vary depending on your tax bracket. Capital gains are usually taxed at a lower rate, and the rate can vary based on how long you've held the asset. Understanding the difference between the two is crucial for effective tax planning and wealth management.


Where Can I Get Tax Advice for a Lower Tax Bill?


When you're looking to minimize taxes, it is always critical to consult your CPA, Enrolled Agent (EA) or other tax professional. However, high-quality wealth managers often provide upfront tax planning help as well in collaboration with your tax advisor.


Who is the Best Tax Advisor to Use for Tax Planning?


Ideal world, ask your wealth manager to work collaboratively with you and your tax advisor. In our experience, this generates the best results.  That's because your tax advisor knows your current and historical tax situation, but your financial advisor knows more about your overall assets and financial plan. Together, we believe they have the best capability to find tax strategies for maximum savings.


Who Can Benefit Most from Regular Tax Planning?


Tax strategy for high-income earners may see the most dramatic benefit. However, anyone who regularly pays taxes can benefit. That's because most planning strategies don't just impact your current year; most continue on for multiple years. In that case, any changes in tax can multiply, saving you money in the future too. 

But those who are subject to higher tax rates should definitely prioritize this as part of their financial plan, as they are likely to see the biggest reduction.


What Does Tax Efficiency Mean for Investing?


Tax planning does not only apply to your personal income taxes.  It should also impact your portfolio.  Investment tax planning is the analysis of investment "location" to make sure you are minimizing the taxes on your financial assets.  For example, municipal bonds can be great tools for tax savings.  However, if you hold them in a retirement account that already has tax advantages, you may be eliminating their tax benefit.  Or, tax-efficient investment strategies may include putting growth investments in a Roth IRA, where taxes are paid upfront on contributions.  That way, any growth will be tax-free, keeping you tax-efficient in the future.


Why are Small Business Tax Planning Strategies Important?


Business owners probably have the best likelihood of finding ways to reduce their tax liability.  So good tax planning is usually an investment that often reaps significant benefits for those who own their own business.


How Often Do Tax Laws Change?


Tax planning is not a one-time event simply because tax laws can and do change periodically. For example, The Tax Cuts and Jobs Act (TCJA) brought significant changes to deductions, depreciation, expense and tax credits that impact businesses. Most business owners needed to consult a tax advisor to see if they could benefit. Unfortunately, many probably missed the opportunity altogether. Then, many of these TCJA provisions expire in 2025. That's why it is critical to make sure that consult a tax advisor who keeps up with all tax law changes.


What Tax Records Do I Need to Keep?


In regard to what tax records to keep, the IRS provides very specific guidelines.  Most vary from three to six years, so be sure to consult their recommendations.  Please note record retention may vary for individual tax, corporations and trusts, so double-check which tax records to keep.  If in doubt, we recommend holding on to records a bit longer.




Like it or not, often people pay more tax every year than they need to. That's where effective tax planning strategies can help. But keep in mind that tax planning is not a one-time event. Instead, it is an ongoing process. It requires a deep understanding of the tax code, current laws, and your personal financial situation. By integrating tax planning into your overall wealth management strategy, you can not only preserve your wealth but also create new opportunities for financial growth. After all, it's not just about how much you make but how much you keep that truly counts.