Financial Planning
June 20, 2024

What Happens to Your Tax Liability with Proper Financial Planning

Stewart Willis

You work hard to earn your money, but depending on how it's managed, you pay a large portion of the government as tax. That’s what we call your tax liability. What happens to your tax liability with proper financial planning? It could decrease because strategic deductions and credits are used effectively.

This blog will explore how careful planning and some smart strategies can change your tax situation. Understanding and managing your taxes can help you keep more money and meet your financial goals.

How Might Taxes Have an Impact on a Person's Financial Plan?

Tax liability is an unavoidable reality when you earn an income. It's the amount you're legally obligated to pay to the government, and it affects everyone – whether you're employed, self-employed, or living off investments. Your tax liability can vary quite a bit, and it's determined by factors like:

  • your total income
  • the types of deductions for which you're eligible
  • your applicable tax rates
  • your filing status (e.g., single, married, etc.)

While no one enjoys handing over a chunk of their hard-earned money to the IRS, high-income earners will have a high tax liability. This doesn’t only refer to salaries but also capital gains from investments. What happens to your tax liability with proper financial planning? You reduce your liability.

4 Main Benefits of Tax Planning

These primary benefits of tax planning demonstrate why tax efficiently helps you to achieve your desired financial outcomes:

  1. You can pay less taxes. The most obvious benefit of tax planning is the reduced amount you pay in taxes. Deductions, credits, and tax-efficient investments can help you lower your taxable income and keep more of what you earn.
  2. You can better achieve your financial objectives by saving on taxes. This frees up more money for other purposes, such as savings, investments, or immediate needs and purchases.
  3. You can better prepare for the future. Tax planning helps you look ahead and prepare for major life events. Do you plan on buying a house? What about saving for your child's education? How’s your retirement planning going? Tax planning helps you to avoid unpleasant surprises.
  4. You can have peace of mind. Knowing you are managing your taxes effectively can give you peace of mind. You’ll feel more secure in your financial situation and confident that you are making wise choices that reduce your tax burden.

Core Tax Planning Strategies

What happens to your tax liability with proper financial planning depends on the strategies you employ. Effective tax planning involves using strategies that can help reduce your tax liability each year. Here are some tax planning strategies that can make a significant difference in how much tax you pay:

  • Defer your income. This strategy involves delaying your income to a future year when you might be in a lower tax bracket. For example, suppose you expect to earn less next year. In that case, you might postpone receiving a bonus or delay withdrawing from a retirement account until then.
  • Take advantage of deductions and credits. Claim all eligible deductions and credits. Deductions can reduce your taxable income overall. These include mortgage interest, certain medical expenses, or even charitable donations. Common tax credits include education credits or credits for energy-efficient home improvements.
  • Invest in tax-advantaged accounts. Retirement accounts like Roth IRAs can greatly reduce your taxable income, and these accounts allow your investments to grow over time.
  • Use tax loss harvesting. This tax planning strategy involves selling investments at a loss to offset capital gains in other aspects of your investment portfolio.
  • Choose a suitable tax filing status. Changing your filing status can benefit your taxes, especially if you are married. Compare the advantages of filing jointly versus separately to find the lower tax liability.

Stacks of coins gradually increasing with a graph

Role of Financial Advisors in Tax Planning

Taxes and financial planning go hand-in-hand—there’s no doubt about that. Financial advisors for tax planning provide expert advice based on your personal financial situation. They can help you maximize your opportunities to reduce your tax liability. Here’s how financial advisors can assist in tax planning:

  • You get custom tax and financial planning advice. Every person's financial situation is unique. A financial advisor provides customized tax planning based on your specific circumstances. They can guide you on the best practices for minimizing taxes, regardless of your financial needs.
  • You get updated on relevant tax laws. Financial advisors stay updated on tax law changes and understand how they affect you. This knowledge is vital for making informed decisions that comply with the law while optimizing your tax situation.
  • You get a financial plan integrated with tax planning. Financial advisors align your tax planning with broader financial goals like retirement savings, home buying, or education funding. This holistic approach ensures all aspects of your financial plan work together.
  • You get to stay on top of future changes. Significant life changes like marriage, childbirth, or business start have tax implications. Financial advisors can help you plan ahead, optimizing your tax outcomes and economic well-being.
  • You get constant financial support and advice. Financial advisors provide ongoing support, advising on financial decisions that may impact your taxes and ensuring you remain on the best path for financial health.

How Do Taxes and Financial Planning Work Together?

More money in your pocket is what happens to your tax liability with proper financial planning. Integrating taxes and financial planning carves a path for a well-rounded financial strategy. This holistic approach is helpful because:

  • It aligns with your long-term goals. Considering taxes in financial planning optimizes retirement, education, and real estate investment strategies to maximize savings and growth.
  • It helps you make financial decisions. Tax considerations in financial planning inform every decision. For instance, choosing between investment accounts depends on their tax implications, which impact your returns and growth.
  • It improves your overall financial flexibility. A holistic financial approach provides greater flexibility. Understanding the tax implications of financial decisions allows you to adapt to changes in laws or personal circumstances without compromising your goals.
  • It helps with better asset management. Integrating tax strategies helps manage assets more effectively by considering the tax implications of buying, holding, or selling assets. This can lead to smarter decisions about asset allocation and timing.
  • It makes estate planning easier. Tax planning eases the stress of estate planning. It reduces the tax burden on asset transfers to heirs, preserving the value of your estate and fulfilling your legacy.
  • It reduces the risk of penalties: A holistic approach minimizes the risk of overlooking tax obligations, which can lead to penalties and audits.

Set Yourself Up for Financial Success

The experts at Asset Preservation Wealth and Tax are ready to help keep more of what you earn. Managing your finances doesn’t have to be a lonely road, we’re help to provide guidance on your circumstances.

Talk to a trusted financial planner today!

Tax loss harvesting is a strategy that may help minimize the amount of current taxes you have to pay on your investments by choosing to sell an investment at a loss. It is only appropriate for certain taxpayers in certain scenarios. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor before attempting a tax loss harvesting strategy.

Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.

The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to and search by our firm name or by our CRD # 175083.

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