When it’s time to file your taxes, many people start getting anxious about whether they’re following the correct tax strategy for financial planning. It is possible to pay less in taxes, but in a way that doesn’t support your long-term goals. If you find yourself wondering whether paying less taxes now is going to result in more financial losses for you in the long run, then it might be time for you to take a closer look at your tax management.

However, do keep in mind that anxiety is simply a state of mind. It’s the “what if” monster rearing its head, even if things are completely in hand. There are times when the “what if” monster may be right, and you’ll need to make some adjustments to your strategy. However, at other times, a closer look at your tax management will reveal that you’re actually doing everything right. So it’s best to approach things rationally; even if there is a mismatch between your tax planning and your long-term goals, it can be rectified.

Is Your Tax Strategy Aligned With Your Financial Plan?

If the “what if” monster has reared its head, then your first step will be to evaluate your strategic tax decisions. Here are some signs that your tax planning is not aligned with your financial goals:

• Money Is Locked Up: Maybe your financial plan involves buying a house in a few years. However, you’ve locked up all your money in investments to help you pay less tax. When you want to buy the house, you’ll have to pay a penalty to get your down payment.
• You Keep Deferring Taxes: This can be done with retirement plans, IRAs, health savings accounts, etc. You end up paying less in taxes through these deferrals, but if you plan to retire early, you might end up paying more later.
• You Minimize Taxes in Every Possible Way: There’s no reason why you shouldn’t use every possible deduction or credit. However, if you’re worried about whether you’re doing it right and whether you’re really entitled to those deductions/credits, then you might have to take another look at your tax strategy for financial planning.
• You Make High-Risk Investments: These might help you save on taxes, but if the risk doesn’t pay off, you end up losing money.
• Your Heirs End Up Paying Your Taxes: Many people save as much money on taxes as they can by investing in IRAs or 401(k)s. However, when your heirs inherit your money, they’re going to have to end up paying the taxes you deferred.

How to Align Your Tax Planning With Your Financial Plan

Your tax strategy should be a part of your financial plan; it should support all the things that you want to do in life, rather than the other way around. Here are a few steps you can take to make sure that the two are aligned:

1. Make Sure You Have a Financial Plan: This is the first step toward securing the money you need to reach your financial goals. Once you know why and when you need money, your fiscal strategy falls into place.
2. Consider the Future: Is paying less in taxes today going to result in paying more later? This may be something you need to discuss with your financial advisor.
3. Consider Cash Flow: Ensure none of your money is invested in tax-saving strategies at the expense of cash flow. After all, you need cash for your day-to-day expenses.
4. Consider Your Risk Profile: This means you shouldn’t invest just to avoid taxes. Invest in high-risk investments only if that’s something you really want to do.
5. Consider Succession Goals: Is your tax planning going to result in your heirs paying taxes later? Just another thing to consider, along with the help of your financial advisor.

Take Control of Your Tax Strategy for Financial Planning Today

Keep in mind that your comprehensive tax plan may also need to change as your life situation changes. It’s not something that you set and forget. So if your “what if” monster has reared its head and you’re wondering whether your financial goals and your tax strategy are aligned, contact us for more information about evaluating and realigning the two. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Dale Crossley and Evan Shear and not necessarily those of Raymond James. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.