What Is the Connection between Tax and Financial Planning?

Tax and financial planning often go hand-in-hand because of how deeply taxes and tax structures affect how money is spent, saved, and distributed. Financial planning typically involves structuring savings accounts, investment portfolios, and trust instruments to provide for stability and security in the future. Tax planning, which usually involves structuring assets so as to minimize tax liability, is a very important part of this. Engaging in financial planning without considering applicable taxes can end up costing more than it saves.

Most countries assess tax in a variety of situations. When money is withdrawn from an investment vehicle, for example, it is often taxed. The same is true for money that is inherited, gifted, or won. The tax codes of most jurisdictions are thick, and the tax consequences of even the simplest of financial transactions can be very confusing. In order to avoid unnecessary tax, and to dodge high-tax transactions, many financial planners will do tax and financial planning together.

In most cases, tax and financial planning requires a close look at every investment, and scrutiny of how distributions will be made. It involves a lot of looking ahead, and requires some educated guesswork. The goal is to predict how tax law will impact a particular investment or intended distribution years on down the line.

When major financial planning is done without tax planning, tax consequences may not be realized right away — but this does not mean that they will not attach later in time. An investor might be surprised to discover that a significant chunk of the money he had planned to use for retirement was owed to the government because it was in a taxable account, for instance. His children might be distressed to learn that the house he left them in his will was subject to such a high inheritance tax that it had to be sold to settle the debt. Savvy tax planning and financial planning at the beginning can avoid these outcomes.

Tax and financial planning are different in some respects, usually in terms of scope. Straight tax planning usually centers on a single investment or tax question. Tax planning is essentially planning for a certain known tax, and uses tax strategies in an applied, specific way.

Similarly, financial planning on its own can be as simple as setting a budget, or setting long-term investment and savings goals. Tax and financial planning usually only come together in situations of major gift and estate planning, when there are a lot of different accounts, investments, and assets at play. Many different financial strategies are usually employed in crafting this kind of a long-reaching financial plan.