October 15, 2023

What Happens To Your Tax Liability With Proper Financial Planning?

The relationship between financial planning and tax liability is an ongoing one. Financial planning is not a set-it-and-forget-it process. As your life and financial situation change, your financial plan must adapt. This includes periodically reviewing and adjusting your tax planning strategies to ensure you minimize your tax liability optimally at each stage of life. Proper financial planning considers the impact of taxes at every step.

Tax Liability

Your tax liability refers to the total amount of tax debt you owe to various tax authorities. This includes federal, state, and local taxes. Your tax liability is determined based on your total income, tax deductions, tax credits, and other factors.

The main factors that contribute to your tax liability include:

  • Your income sources - Salary, business income, investment income, etc.
  • Tax deductions and credits you qualify for and claim
  • Your tax bracket is based on your total taxable income
  • Capital gains from selling assets like stocks or property

Businesses also incur tax liabilities based on income, expenses, deductions, number of employees, business structure, and other variables.

The Internal Revenue Service (IRS) is the main federal tax authority that collects tax revenue and enforces compliance with tax laws. State departments of revenue and local municipalities also assess and collect taxes. Failing to meet tax obligations can result in penalties, interest charges, and audits.

Strategies to Reduce Tax Liability Through Financial Planning

Vehicle Deductions and Tax Liability

As a business owner, you can deduct the full purchase price of qualifying vehicles in the year they are put into service. This is done under Section 179 of the IRS tax code. Maintaining detailed mileage logs and records is key to utilizing this substantial tax deduction.


Sarah owns a small catering business. She purchases a new van to deliver food to events. Under Section 179, she can deduct the full purchase price of the van in the year she starts using it for her business. She can claim this deduction by maintaining a detailed mileage log and significantly reducing her tax liability for that year.

Tax-Efficient Investment Strategies Through Individual Securities

Managing individual securities allows for a more personalized approach to tax management. Unlike mutual and index funds, investing in individual securities offers the ability to manage capital gains and losses on a more granular level, which can be highly advantageous from a tax perspective.


John has a diversified portfolio of individual stocks. By carefully managing the sale of these securities, he can strategically realize losses to offset gains, and manage the timing of these transactions to optimize his tax situation.

Understanding Mutual Fund Tax Inefficiencies

Mutual funds can create tax inefficiencies due to the frequent buying and selling of securities within the fund, which can trigger capital gains distributions. On the other hand, owning individual securities allows for better control over the timing of buy and sell transactions, enabling more effective management of capital gains and losses.


Emily invested in an actively managed mutual fund and experienced a capital gains distribution despite the fund's lackluster performance. On the other hand, John, who invested in individual securities, could manage his sales to minimize capital gains and optimize his tax situation.

Retirement Account Optimization

Contributing to tax-advantaged retirement accounts like 401(k)s, IRAs, and SEP-IRAs can significantly reduce your taxable income. Your financial advisor can help you understand the different accounts, maximize allowable contributions, and choose Roth or traditional options wisely.


Mike earns $100,000 annually. He contributes $19,500 to his 401(k), reducing his annual taxable income to $80,500. By doing so, he saves for retirement and reduces his current tax liability.

Tax-Loss Harvesting

Strategically realizing investment losses through tax-loss harvesting is a key strategy to offset capital gains and reduce tax liability. Your financial advisor can advise you on when to sell underperforming assets to realize losses while maintaining your overall investment strategy.


Laura noticed that one of her investments has significantly underperformed this year. She decides to sell it, realizing a capital loss. She then uses this loss to offset capital gains from other investments, reducing her overall tax liability.

Business Structure and Deductions

Choosing the right business entity, such as an S-corp or LLC, can provide tax advantages for business owners. Your financial advisor can also identify deductible business expenses and guide you in setting up proper record-keeping and accounting practices to substantiate deductions and stay compliant.


Raj runs a tech consultancy. After discussing with his financial advisor, he decided to structure his business as an S-corp. This allows him to pay himself a reasonable salary and take the remainder of his income as distributions, which can be taxed at a lower rate.

Estate Planning

Estate taxes can take a significant bite out of the legacy you wish to leave behind. Proper estate planning strategies, including gifting, trusts, and life insurance, can help minimize your tax liability. Your financial advisor can work with your estate planning attorney and CPA to integrate tax-efficient wealth transfer into your financial plan.


Mrs. Thompson has a sizable estate that she wishes to leave to her children. She sets up a trust to minimize estate taxes and transfers some of her assets into it. She also purchases a life insurance policy with her children as beneficiaries, ensuring they receive a tax-free inheritance.

Advantages of Investing in Individual Securities for Tax Efficiency

Investing in individual securities can provide significant tax advantages. With the ability to control the timing of buy and sell transactions, investors can strategically manage capital gains and losses to minimize their tax liability.

The Role of Professional Financial Planners

The expertise of our team, along with our collaborative approach with your accountant, ensures that you can effectively manage your portfolio of individual securities to achieve optimal tax efficiency. Our focus on individual securities rather than index or mutual funds aligns with our commitment to providing personalized tax planning strategies.

  • Tax-efficient investing strategies
  • Retirement savings and distributions
  • Estate, inheritance, and gifting tax planning
  • Small business tax deductions and credits
  • Timing asset sales to optimize capital gains treatment
  • Charitable giving techniques

Optimize Your Tax Strategy with SevenBridge Financial

At SevenBridge Financial, we go beyond just creating a tax plan. With the expertise of our dynamic team, we collaborate directly with your accountant, ensuring you harness the full potential of tax loss harvesting, charitable giving, and more. Our proactive approach ensures you're never caught off guard by an unexpected tax bill.

Don't navigate the complex world of tax planning alone. Contact us today, and let us put your money to work for you.

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