Tax Forecasting vs. Tax Planning

I recently had a chat with a client. She was complaining about the amount of income taxes that she had just paid for last year’s tax bill. She was even more upset to learn that for 2024, she could expect to pay the IRS $152,500.

“How do you know you’re going to owe $152,500?” I asked.

“My CPA just told me,” she replied.

“Actually,” I explained, “what your CPA told you is what your tax liability is likely to be if you don’t take action to change it. But there are a number of proactive strategies we can look at that can make a big difference.”

• Tax forecasting?involves estimating your future tax obligation based on the specifics of your estimated income and expenses. An accurate tax forecast can inform your decisions about budgeting, investments and other financial matters.
• Tax planning aims to legally reduce the amount of taxes you will owe by optimizing financial strategies and using available tax-saving opportunities.

People who have high incomes need both.

Tax planning strategies can get quite complex

Most people we work with are already taking advantage of the basic tax planning strategies that you read about every year in articles about “Top Tips for Reducing Your Tax Bill.” They give to charity, maximize their contributions to their retirement plans, itemize their deductions, etc.

What many high earners and high net worth individuals do not realize is that when you are facing a potentially significant tax bill, there are other, often very complex strategies that should also be considered.

For example, we helped one client avoid a $300,000 tax bill by using a leveraged charitable giving strategy that involves a charitable contribution and life insurance. There are real estate transaction strategies, oil and mineral rights strategies and many more perfectly legal ways to reduce your tax liability.

However, be aware that once you move from the simple to the complex, it usually takes a team of experts to properly structure it all. For example, as your financial advisor we collaborate with your CPA, attorney or other experts in our network to thoroughly analyze the full impact of each option. Once a decision has been made we can then successfully implement the plan or strategy for you.

You don’t have to be stuck with a high tax bill

The important thing to understand here is that tax forecasting should just be the first step. Once you know what your tax obligations might be, we can help you take action to minimize that tax liability. All, of course, within the framework of the applicable tax laws and regulations.

If you want to reduce your future tax liability, give me a call. With our team of national experts and virtual family office, Forward Advisors has the expertise to do very high-level tax planning for you.