Don’t Let the Tax Planning Tail Wag the Dog
At Truepoint, we often use the phrase: “Don’t let the tax tail wag the dog.” It’s a simple reminder of an important principle—while tax planning is a critical element of a sound financial strategy, it shouldn’t dictate or overshadow broader financial goals.
It’s true that tax efficiency plays a significant role in building long-term wealth. However, when tax considerations are prioritized in isolation, it can lead to decisions that may ultimately undermine a client’s overall plan. Instead, effective financial planning requires a holistic approach that considers tax implications alongside their priorities, values, and long-term goals.
Taxes Are One Part of a Larger Picture
Consider the example of equity compensation. Clients with stock options often ask, “How much will this cost me in taxes?” or “When should I exercise to minimize my tax burden?” These are important questions, and we certainly address them. But we also assess additional factors—such as the client’s financial security, market volatility, and time horizon for exercising those options.
For instance, if a client chooses to delay exercising options solely to achieve a lower tax rate, they may risk a decline in the stock’s value. A 10% drop in share price could more than offset the anticipated tax savings. In such cases, the tax strategy should support—not override—the broader financial context.
Long-Term Planning Often Involves Short-Term Costs
Another area where tax decisions require long-term thinking is Roth conversions. At first glance, paying taxes now to convert funds from a traditional IRA to a Roth IRA may seem counterintuitive. Understandably, many clients question why they would willingly increase their tax bill.
However, when evaluated over the long term, this strategy can significantly reduce a client’s overall tax burden. If a client is in a lower tax bracket today than they expect to be in retirement, a Roth conversion allows them to lock in today’s lower rate. We often identify windows of opportunity—such as years with temporarily reduced income—where recognizing income at a 0% or 10% rate can result in substantial long-term savings.
Aligning Tax Planning Strategies with Charitable Goals
Charitable giving is another common area where tax benefits come into play—but should never be the sole driver. We’re often asked, “How much should I give to maximize my tax deduction?”
Our response is to first determine how much the client genuinely wants to give and to what causes. From there, we can design a tax-efficient giving strategy. This might include donating appreciated securities, using a donor-advised fund, or bunching donations in years with higher income to maximize the deduction. The goal is to enhance the impact of the gift—without altering the intent or compromising financial security.
Starting With the Plan, Not the Tax Code
Ultimately, we believe effective tax planning should serve the broader financial plan—not the other way around. While tangible, near-term tax savings may feel rewarding, we encourage clients to begin with their long-term objectives: What do you hope to accomplish? What brings you peace of mind? What resources will you need in the near and distant future?
By starting with a comprehensive financial plan, we ensure tax strategies are integrated thoughtfully and intentionally. This approach leads to better outcomes—not just in tax efficiency, but in achieving the financial confidence and lifestyle our clients desire.
Because at the end of the day, while tax planning is an essential part of what we do, it should always support your goals—not steer them.
