Tax preparation and tax planning are related, but they serve different purposes. Preparing a return reports transactions that have already happened. Tax planning looks forward: it evaluates the tax effect of a decision before it occurs, while there is still time to adjust the timing, the amount, or the approach.
Why Tax Planning Should Happen Throughout the Year
A single meeting in March often comes too late to influence the year being reported. Financial circumstances change throughout the year, and each change can affect what you owe. Common examples include:
- A raise, a new job, a job loss, or a move from employee to self-employed
- A business that becomes more or less profitable than expected
- Investment gains or losses, including sales of stock, funds, or property
- Changes in retirement contributions or the start of retirement distributions
- Estimated payments that no longer match actual income
- Major decisions such as buying a home, selling a business interest, or starting a new venture
Start With Your Current Financial Picture
Useful planning begins with accurate information. A good starting point is your most recent return, which shows how your income, deductions, and credits came together last year. From there, build a projection for the current year using year-to-date income and expenses.
Compare the projection with what is already being paid. If you receive wages or a pension, the IRS Tax Withholding Estimator (opens in a new tab) can help you check whether your withholding is on track; the IRS suggests checking early in the year and again after life changes such as marriage, a new job, or the birth of a child. If you make estimated payments, confirm that they still reflect your expected income. Finally, note significant changes and identify deductions or credits that may apply to you.
Review Your Business and Tax Structure
For business owners and self-employed individuals, the structure of the business affects how income is taxed. Sole proprietorships, partnerships, and S corporations are taxed differently, and the right choice depends on profitability, the owners' goals, administrative costs, and state requirements. An S corporation election can be appropriate for some businesses, but it adds payroll, compliance, and recordkeeping obligations and is not the right fit for every owner.
Owner compensation deserves particular attention. The IRS states that S corporations must pay reasonable compensation (opens in a new tab) to shareholder-employees for the services they provide before taking non-wage distributions, and it can reclassify distributions as wages when compensation is not reasonable. Setting and documenting a supportable salary is part of operating an S corporation correctly.
Other areas to review include retirement plan options for the business, whether ordinary business expenses are being captured and documented properly, and the timing of transactions such as equipment purchases, invoicing, and large expenses.
Plan Before Major Financial Decisions
Some decisions are difficult or impossible to undo once they are completed. Reviewing the tax impact in advance is especially helpful before:
- Selling investments, real estate, or other appreciated assets
- Purchasing significant business equipment, vehicles, or property
- Taking distributions from retirement accounts
- Converting traditional retirement savings to a Roth account
- Making large charitable contributions
- Expanding a business, hiring employees, or operating in another state
The goal is not to let taxes drive every decision, but to understand the consequences before acting.
Keep Estimated Tax Payments Current
Income that is not subject to withholding, such as self-employment income, S corporation or partnership income, interest, dividends, and rental income, often requires estimated tax payments (opens in a new tab). For federal purposes, the IRS divides the year into four payment periods, each with its own due date, and individuals generally use Form 1040-ES (opens in a new tab) to figure and pay the tax. The IRS also notes that you can owe an underpayment penalty even if you are due a refund when you file.
Virginia has its own system. The Virginia Department of Taxation requires individual estimated tax payments (opens in a new tab) in some situations, made in quarterly installments on a schedule that does not line up exactly with the federal dates. Virginia Tax advises recomputing your estimate when your expected income changes and adjusting the remaining payments up or down.
The practical lesson for both is the same: when income rises or falls during the year, revisit your projections and update your payments rather than relying on figures set in January.
A Practical Year-Round Tax Planning Schedule
A simple calendar helps keep planning from slipping until the last minute:
- Beginning of the year: Gather tax documents, review last year's results, check withholding, and set an initial estimate for the year's payments.
- Midyear review: Compare actual income and expenses with your projection, update estimated payments, and look ahead to any planned purchases, sales, or business changes.
- Before year-end: Identify actions that generally need to be completed within the calendar year to count for that year, and confirm that payments are on track.
- After filing: Review the completed return for lessons that apply to the new year, and adjust withholding or estimated payments if needed.
Keep in mind that different actions have different deadlines. For example, the IRS allows contributions to traditional and Roth IRAs (opens in a new tab) for a given year until the tax return filing deadline, not including extensions, while many other transactions must be completed within the calendar year to count for that year.
When Professional Tax Planning May Be Valuable
Many people can handle straightforward situations on their own. Professional guidance tends to be most useful when circumstances are changing: a new business, rising profits, an S corporation election, a significant investment sale, retirement, or income from more than one state. In those situations, a CPA can help you build projections, evaluate options, and coordinate planning with tax return preparation so that the decisions made during the year are reflected accurately when the return is filed.
The most effective approach is usually a steady one: review your situation periodically, plan before major decisions, and keep payments aligned with your actual income.
This article is general information, not tax, legal or accounting advice for your specific situation.
