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Expert Insights for Smart Financial Planning

Save on Taxes By Being Proactive Instead of Reactive

Tax planning with your financial adviser can add up to huge savings.


During March, many of us turn our attention to taxes. After all, the IRS expects to hear from us every year by the middle of the following month. You may have your trusted accountant take care of the numbers for you, or you may go the do-it-yourself route and use TurboTax or a similar program. Each year, you or your accountant looks back over the previous year and finds every possible way to maximize your deductions and minimize your tax liability. In a nutshell, this is tax preparation.

See Also: Kiplinger's State-by-State Guide to Taxes

You're looking for deductions related to property tax or mortgage expenses. Or, if you had significant medical expenses tallying more than 10% of your adjusted gross income, you may have yet another potential deduction. In many ways, a bulk of tax preparation is looking back to find these deductions, which can add up to incredible savings for the year.

On the other hand, there is tax planning. Rather than looking back at the past year, tax planning involves looking forward five, 10 or 20 years. When you plan, you consider what you can do to keep your tax burden to a minimum while positioning some of your savings to generate a tax-free income.

For example, if you had an additional $30,000 in income every year, but that income was taxed at the federal and state combined rate of 30%, you would be left with only $21,000. Through careful tax planning, you could change a loss of $9,000 into a gain.


That's where a well-trained and trusted financial adviser comes in. He or she can show you how to take that additional income from taxable to tax-free. Let's go back to the example of $30,000. You could invest this money in a laddered municipal bond portfolio or in a properly structured low-cost indexed life policy that offers tax-free distributions. When that amount is tax-free, you get to keep that $9,000 you would have otherwise given to the state and federal government.

You can then use that money however you see fit. Use the tax savings to take your kids or grandkids to Disney World. Treat yourself and your spouse to a dream vacation. Or continue to save. No doubt you and your adviser would prefer that you get the most out of your earnings, enjoying the money you worked hard for rather than seeing it lost to avoidable taxes.

Consider the long-term tax savings. If you're generating $30,000 in additional income, over one year you can save $9,000. Over 10 years, that's $90,000 in tax savings! In 20 years, it's an incredible $180,000, not to mention the potential for growth over that time! This is all on top of your standard income.

Years ago, when I was studying law at the University of California, I became very aware of provisions in the tax code that wealthy people used routinely. These are provisions that the middle and upper middle class, along with their financial advisers, are often unfamiliar with. Today, conscientious, well-informed advisers are on a mission to bring our clients up to speed on tax planning strategies that will save them a considerable amount of money.


Much has been written over the last several years in various realms (e.g., law enforcement, parenting, public relations) about the preference of being proactive over being reactive—not to mention the age old "ounce of prevention, pound of cure" idiom. A capable and informed accountant might indeed be able to look backward over the previous year and find ways to diminish your tax burden. Still, in a sense, that's reactive, but that's largely what tax preparation is. Proactive tax planning can both take the sting out of April 15 and increase your disposable income or make for far more efficient growth of your retirement savings.

See Also: Where Clinton and Trump Stand on Taxes

Ron Gelok is founder of Ronald Gelok and Associates, a Registered Investment Adviser firm. His clients find his help gives them greater confidence about their financial future.

Steve Post contributed to this article.

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This article was written by and presents the views of our contributing expert, not the Kiplinger editorial staff.