Why does tax planning matter?
It Optimizes Your Business Plan
Taxes are one of life's certainties, and no one likes giving up some of their hard-earned cash. With proper tax preparation, however, it's possible to pay less in taxes or receive a larger refund at the end of the year.
The primary goal of effective tax planning is to minimize income taxes as much as legally possible; it cannot cross the line into illegal evasion of tax through deceit, subterfuge, or concealment. In contrast, financial planning is primarily concerned with increasing net worth.
By integrating tax considerations into your financial plan, you gain a broader view of your financial landscape. This holistic approach fosters informed decision-making, bolstered wealth building and preservation, and can lead to opportunities that are better aligned with your tax objectives.
Understanding how taxation works can give you a big-picture idea about the ways your money gets taxed and empower you to take greater control of your finances. A financial advisor can also help you align your tax strategies to reach your financial goals.
It Optimizes Your Tax Liability
Tax planning can also help you optimize your tax liability. Taxes are taxes, but by planning, you can understand what changes can be made and their ROI to take advantage of deductions and credits. This can free up money that you can reinvest back into your business.
There is tremendous value in implementing effective tax planning for your individual clients. By understanding what their priorities and needs are, you can provide them with tax guidance that deepens their knowledge of their individual tax position and helps them improve their financial situation.
Usually, tax planning consists in maintaining the taxpayer in a certain tax bracket in order to reduce the amount of taxes to be paid, which can be done by manipulating the timing of income, purchases, selecting retirement plans, and investing accordingly.
Economists specializing in public finance have long enumerated four objectives of tax policy: simplicity, efficiency, fairness, and revenue sufficiency. While these objectives are widely accepted, they often conflict, and different economists have different views of the appropriate balance among them.
Objective: The objective of tax planning is to decrease your tax liability by using the existing provisions of the law. On the other hand, the aim of tax avoidance is to dodge your tax payments by taking advantage of loopholes in the law.
What is an example of tax planning?
Tax planning examples include tax diversification, investing in schemes such as PPF, National Pension System, Sukanya Samriddhi Yojna and more. Additionally, claiming deduction for payments like home loan premiums,mediclaim premium tax deductions, etc. also help in tax planning by reducing overall tax outgo.
The most relevant tax for financial planning is the income tax, as it affects the taxpayer over an entire lifetime. Different kinds of income must be defined and declared on specific income schedules and are subject to tax. Deductions and exemptions reduce taxable income. Credits reduce tax obligations.
Final answer: Income shifting, timing, and conversion are common tax planning strategies used to reduce tax liability. An arms-length transaction, however, is not a tax planning strategy; instead, it's a term used for a fair-market transaction between two parties.
Keeping thorough and accurate records of your business's income and expenses throughout the year makes filing a tax return and paying the right amount of tax much easier. Without good records, you could miss out on valuable tax deductions or put yourself at risk for an audit.
So why is the U.S. tax law and filing system so burdensome on taxpayers and the agency? Because the U.S. tax system is trying to do more than collect taxes, according to experts. Congress uses the tax system as a tool to achieve economic and social goals and then relies on a beleaguered IRS to execute those plans.
Late fees and interest are only the beginning.
Interest and penalties begin to accrue immediately after Tax Day โ which is April 15, 2024 โ and continue until the balance is paid in full. Eventually, the government could garnish your wages, place a lien on your property or even revoke your passport.
In general terms, the goal of tax planning is to maximize the taxpayer's after-tax wealth while simultaneously achieving the taxpayer's non-tax goals.
Definition. Tax evasion is the illegal non-payment or under-payment of taxes, usually by deliberately making a false declaration or no declaration to tax authorities โ such as by declaring less income, profits or gains than the amounts actually earned, or by overstating deductions.
The objective of tax planning is not always to minimize taxes rather the goal is to arrange one's financial activities in a way that will reduce the present value of tax costs such that maximum wealth accumulation can occur in the time period specified.
- Tax planning starts with understanding your tax bracket.
- The difference between tax deductions and tax credits.
- Taking the standard deduction vs. itemizing.
- Keep an eye on popular tax deductions and credits.
- Know what tax records to keep.
- Tweak your W-4.
- Tax strategies to shelter income or cut your tax bill.
What are two ways in which you can benefit from careful tax planning?
In addition to saving people money, tax planning strategies help taxpayers avoid tax penalties, get the most from their tax deductions, keep their financial documents organized, and plan for the future.
- Make the maximum retirement contributions.
- Contribute to a health savings account.
- Convert to a Roth IRA.
- Buy municipal bonds.
- Establish a donor-advised fund.
- Tax residency planning.
- Invest in qualified dividends.
- Hire your children to work for your business.
It's never too early. If you want to pay the least amount of income tax each year, then it may be helpful to start doing some tax planning. Don't worryโyou don't need an accounting degree to make some smart tax decisions. A little planning goes a long way.
Start with a review of your current tax situation
Check if you have any outstanding debts that can be paid off before the end of the year. Doing this will help you plan for next year's taxes and avoid any penalties or extra fees.
Individual income taxes are the largest single source of federal revenues, constituting over one-half of all receipts. As a percentage of GDP, individual income taxes have ranged from 6 to 10 percent over the past 50 years, averaging 8 percent of GDP.
