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Tax planning, done properly, is act of creating a proper tax structure for someone before they begin to create taxable events. It is also the ongoing act of reducing taxes as much as possible to allow the person to keep the most amount of income possible as they navigate the legalities of the tax code. Proper tax planning always takes the path of least resistance with probability of maximum gain. More specifically, tax planning refers to the ongoing analyzing of one’s tax profile at the current time and as income variables change and creating actionable steps to reduce the overall tax burden. A thorough tax plan reduces current and future tax liability, allowing them to meet their financial goals.
The objective of tax planning is to make sure there is tax efficiency. With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency. Tax planning is a significant component of a financial plan. Reducing tax liability and increasing the ability to make contributions towards retirement plans are critical for success.
Tax planning comprises various considerations, such as size, the timing of income, timing of purchases, and planning are concerned with other kinds of expenditures. Also, the chosen investments and the various retirement plans should go hand-in-hand with the tax filing status as well as the deductions in order to create the best possible outcome for the individual or business.
Everyone wants to thoughtfully plan for paying taxes, but without understanding the basics and fundamentals of taxation this can be impossible. Trying to establish a tax plan is futile if you do not have a satisfactory understanding as to how your income is taxed. Income is normally divided into 3 major
Ordinary income is comprised of income received from wages or a salary, income earned through self-employment, and dividends.
Capital income is comprised of the income you receive from the sale of property, investments or assets that produce a “capital gain.”
Passive Income is comprised of the income you receive from real estate investments, limited partnerships or other business activities that are considered “passive” income, and not “earned income.”
Each of these categories are taxed at different rates and with different rules around each of these different categories. It is very much possible to reduce your income, not literally in the sense that you lose money but income reduction in regard to taxes. The term Gross Income is now relevant because Gross Income is the sum collection/gross collection of all your income. In saying that, if your GI is high, so are your taxes.
In order to reduce your taxes, you need to reduce your gross income which can be accomplished through the contribution of money into your retirement plan, traditional IRA, a 529 plan, an Education Savings Account and so forth.
The new figure must be calculated and submitted – this is known as the Adjusted Gross Income. Your Adjusted Gross Income sets you up to file for tax deductions, tax credits, and other things to offset your taxable income.
In order to lower the amount of taxes you pay or obtain a tax refund, you’ll need an understanding of tax deductions. Tax deductions are a list of financial items that reduce your total tax payable or taxable income such as:
Organize your financial affairs to identify these expenses and have all the receipts and proof of such expenses prepared and stored for submission. This will assure that you receive your rightful tax refunds and lower your taxable income.
Tax credits are another popular way of reducing your taxes. In short, tax credit is an amount of money that can be offset against a tax liability. There are different forms of tax credits, which can be received in different ways, but 2 forms of popular tax credits are known as:
Working Tax Credits – Depending on how long you work and how much you earn, you may qualify for a tax credit.
Child Tax Credit – If you have a child and your income meets the necessary criteria, you may qualify for tax credits.
Many other credits are available for things like education. If you have any plans to take additional college classes, you qualify for a college expense tax credit.
The most effective way of managing your taxes, reducing tax owed and getting your rightful tax refunds is by creating an intelligent and detailed plan for the year.
Identify all your expenses that are classified and recognized as expenses for tax deductions.
Establish the different means of income reduction you wish to pursue for the year and the amount payable for each.
Set a date for when you plan to work on your Adjusted Gross Income.
Establish a date to fill out your tax return which affords you ample time to double check everything and make certain the form is filled out appropriately without any common errors or mistakes.
Seek out professional help for the more intermediate forms of taxing advice that can minimize the amount of payable taxes required from you.
Concluding Remarks
Use these fundamentals about tax planning to better equip yourself with knowledge that will assist you in putting together a tax plan that is suitable and cost effective for your business and financial affairs.
While taxes are unavoidable, we manage your overall financial situation in a way that seeks to minimize taxable events. Tax planning considers the tax implications of individual, investment, or business decisions, usually with the goal of minimizing tax liability. While decisions are rarely made solely on their tax impact, you will have a working knowledge of the income or estate tax issues and costs involved.
