While tax preparation means completing tax forms—or bringing paperwork to a tax preparer—tax planning means making money decisions with an eye toward minimizing tax bills.
Someone who thinks about tax planning only during tax prep season is likely to miss deadlines and opportunities… and discover that tax preparers are too busy this time of year for in-depth tax-planning chats.
“Tax planning means making sure there’s not going to be a surprise when they file their return in April,” says tax preparer Maryann Reyes. “But a lot of times once you get to April it’s too late to do anything.” Reyes walked us through what tax planning topics and strategies taxpayers should be weighing throughout the year.
What Tax Planning Is
Tax planning entails making financial decisions that legally lower tax bills, either in the current year or future years.
Those decisions might involve things like managing investments, taking steps to qualify for tax deductions, or deciding whether it makes more sense to do something tax-related this year or next.
Which tax-planning steps make most sense for a particular taxpayer depend on that taxpayer’s financial situation and stage of life: “If retirement is on the horizon, maybe they need to stop and think about what they’ve contributed to retirement plans so far, and whether they have the ability to contribute more,” says Reyes.
“Or let’s say they’re running a business, and they’ve had a good year, what can they do to minimize taxes on that business income?”
Key Tax Planning Strategies to Know
Review your withholding and/or quarterly tax payments
Income taxes aren’t due only on April 15—taxpayers are expected to pay the taxes they owe over the course of the year.
Employees typically have a portion of each paycheck withheld to pay their taxes throughout the year. But taxes generally aren’t withheld from investment income and other types of income, so you may need to make quarterly estimated tax payments to cover what you owe.
Failure to pay sufficient taxes during the year can lead to big tax bills and underpayment penalties later. Overpaying taxes can lead to a tax refund, but it also means the taxpayer has essentially given the government an interest-free loan.
What to do: Review your withholding and/or quarterly tax payments if…
- You faced a big tax bill when filing your return the prior year
- You received a big refund
- Your income has changed substantially in the past year
- You were paid an unusually large bonus
- You earned an especially large amount of investment income
- Your spouse has experienced any of the above
- You recently married or divorced
The IRS Tax Withholding Estimator can help you determine whether your withholding and estimated tax payments should be adjusted. To adjust withholding, complete Form W-4 and submit it to your employer.
Maximize tax-advantaged accounts
Contributing money to tax-advantaged accounts such as 401(k)s, IRAs, health savings accounts (HSAs), flexible spending accounts (FSAs), and 529 college savings plans can lower taxpayers’ tax bills, either in the current tax year or the future.
But each of these plans has contribution caps and deadlines, plus rules about when and how money can be withdrawn.
What to do: Confirm the contribution caps and deadlines of the tax-advantaged accounts available to you before year-end to reduce the odds of missed opportunities.
Contributions to IRAs and HSAs usually can be made until the tax filing deadline for the following year, which typically falls on April 15.
But contributions to 401(k)s and 529 plans typically must be made by year-end. However, in some states—Georgia, Indiana, Iowa, Kansas, Mississippi, Oklahoma, South Carolina, and Wisconsin—contributions made for the prior year after year-end may still qualify for a state tax benefit.
If contributions to a tax-advantaged account are made via payroll deductions, it might be necessary to inform that employer’s benefits department of a decision to adjust contribution amounts well before year end.
Money contributed to an FSA often is forfeited if not spent by either December 31 or the following March 15.
Consider a Roth IRA conversion
A Roth IRA conversion could be a big long-term tax saver if you’re in a lower tax bracket this year than you expect to be in the future.
If you shift money from a traditional IRA or 401(k) to a Roth, you’ll pay income taxes on the money moved in the year of the conversion… but you won’t face income taxes on earnings later withdrawn from the Roth, assuming certain rules are followed.
What to do: If you decide this is a good year to do a Roth conversion, take care not to convert so much that you accidentally push yourself into a significantly higher income tax bracket or cost yourself means-tested benefits, such as Affordable Care Act subsidies—remember, the money you convert will be taxable income.
Manage capital gains and losses
Selling an investment for more than you paid for it can create a capital gain. But there might be ways to reduce or avoid any resulting capital gains tax bill.
What to do: If you wait until you’ve held the asset for more than one year before selling, more advantageous long-term capital gains tax rates apply rather than the higher rates typical of short-term capital gains.
In fact, if your taxable income for the year is below $98,900 (below $49,450 if single), that long-term rate will be 0%. If selling an appreciated asset would push your income above this threshold, consider spreading that sale out over multiple years.
Other options for reducing the tax generated by selling appreciated assets include:
- Selling assets that have declined in value
- Creating capital losses that can be used to offset capital gains
- The tax-loss harvesting tactic
- Donating appreciated assets to charity, which not only avoids the capital gains tax bill but also could create a deductible donation
- Gifting the appreciated asset to a family member who’s in a lower tax bracket
- Reinvesting the capital gain into an Opportunity Zone investment
Choose tax-smart years for charitable giving
If you plan to make a sizeable donation to charity, it makes tax-planning sense to do so in a year when this donation will be tax-deductible.
What to do: Make large charitable donations in years in which you have especially high medical bills or other itemized deductions.
Cash donations of modest size—up to $2,000 if married filing jointly (up to $1,000 if filing single)—can be deducted even if you claim the standard deduction, but you must itemize your taxes to deduct larger donations, and itemizing makes most sense in years when you have multiple sizeable expenses to deduct.
Other itemized deductions might include big medical bills, hefty state-and-local taxes, and/or mortgage interest bills.
Example: A philanthropic taxpayer who intends to give $10,000 per year to a charity might instead hold off on making that donation during a low medical bill year, then “bunch” two years of donations into the following year when he has a hospital stay.
Tax Planning Moves for Different Life Stages
Employment
W-2 employees should periodically reevaluate their withholding, particularly if their household income has changed for reasons unrelated to their own wages.
Your employer likely knows to increase your withholding if it gives you a big raise… but it won’t know to do so if your spouse receives a big raise that lifts both of you into a higher tax bracket.
Self-employment
Self-employed workers should periodically review their income and quarterly tax payments. It might make sense to adjust the estimated payments made for the remainder of the year if income has been unexpectedly high or low.
Retirement
Retirees should confirm that any Required Minimum Distributions (RMDs) have been made and that taxes are being withheld from their retirement account distributions.
“I’ve seen through the years where retirees assume that the brokerage house would have withheld taxes,” says Reyes, “but when they receive the tax forms they see there wasn’t any.”
High-income earners
High earners can face very steep tax bills, which makes tax planning especially important. Their tax-planning needs can be complex, so the best advice is to discuss tax planning regularly not only with a tax preparer, but also with a financial planner and estate planner—these forms of planning are all interrelated.
Common Tax Planning Mistakes to Avoid
Five common and potentially costly tax-planning missteps…
1. Delaying tax planning until tax-prep season
By the time people fill out tax forms in February-April, many tax-planning opportunities have already been missed. “The last thing you want to do is bring your tax documents to your accountant and say, ‘What can I do to reduce my liability?’ says Reyes. “By then it’s just too late.”
2. Overlooking estimated taxes
Paying quarterly taxes is second nature for people who have been self-employed for many years, but it’s sometimes overlooked by people new to self-employment or who have a big investment profit. “The typical W-2 employee is not used to paying estimated taxes,” notes Reyes.
3. Missing deadlines for tax-advantaged savings
As noted above, many tax-advantaged plans have December 31st contribution deadlines, or occasionally even earlier deadlines.
4. Forgetting state taxes
When someone has a life event or financial change that affects their federal income taxes, that change is likely to impact their state income taxes, too, unless they live in a no-income-tax state.
Example: If you need to increase your federal estimated tax payments, also check if you should increase the estimated tax payments you make to your state.
5. Overlooking financial events from early in the year
It’s common for taxpayers to misremember precisely when early-year tax-related events occurred, according to Reyes.
By the time people fill out 2026 tax forms in March 2027, for example, they might mistakenly think money earned in January 2026 was earned in 2025, and conclude that taxes were paid on it the prior year.
“They need to know what actually happened when,” Reyes says, “so they can plan appropriately.”
A Year-Round Tax Planning Checklist
Spring
Once your return is filed, make note of any tax opportunities you missed and unexpected tax consequences you faced. Use this knowledge to take better advantage of tax-planning options in the subsequent tax year.
Summer
Do a mid-year tax-planning check-in. Are your income, tax-advantaged account contributions, withholding / estimated tax payments, and other tax matters on track? If not, decide if you want to make any mid-year tax-planning adjustments.
Fall
If your employer’s open enrollment period is approaching, decide how much you want to contribute to tax-advantaged plans for the coming year.
If you work with a tax preparer, contact his or her office to arrange a tax planning meeting—tax preparers often have time available between late October and early December. During this meeting, ask the tax preparer what advice he has for the remainder of the year and for the following year.
“One of the things people forget to talk to their tax preparer about is the following tax year,” says Reyes. “Discuss whether that next year is going to be very similar to the current year or whether they expect any changes.”
Winter
Make final contributions to tax-advantaged plans that have December 31 deadlines. Also make any intended charitable donations by year-end, complete any intended Roth conversions, and take RMDs if applicable.
If you plan to sell appreciated investments soon, decide whether it makes more sense to do so in the current tax year or early the following year, based on factors including your tax bracket.
If you have an FSA, spend any money remaining in it before its deadline.
Documents to Keep for Better Tax Planning
Paperwork worth having on hand when you do tax planning or meet with your tax preparer for tax-planning purposes includes:
- Your federal and state tax returns from the most recent year or two
- Your pay stubs or other paperwork summarizing your income and withholding for the current year
- Your most recent investment statements from brokerages and mutual fund companies, including details about any money paid into or removed from tax-advantaged accounts
- Paperwork showing your current property taxes and mortgage interest
- Your medical bills, if these have been substantial during the current year
- Records showing estimated tax payments made for the year to date
- Paperwork documenting any charitable donations
If you own a business, also gather details of that business’ income and expenses.
When to Get Help from a Tax Professional
It can be worth discussing tax planning with an experienced tax pro periodically even if you prepare your own tax return.
Tax software might be sufficient to help you fill in tax forms if your finances are simple… but that doesn’t mean it will direct you to the best planning opportunities to reduce current and future tax bills.
