Tax planning is the development of a strategy for minimizing or delaying an entity’s tax burden within the structure of its financial and operational plans. The result can be a reduction in the effective tax rate paid, leaving more cash for other purposes. Several tax planning strategies are noted below.
Basic Tax Planning Strategies to Use Now and in the Future
Most people despise tax season and for good reasons. It is overwhelming, stressful, and at times downright confusing. This is especially true now, with each year Budget updates and change tax laws, rates, brackets, and more. Hiring an accountant helps, but there are still things that you need to do independently to get the best service and the biggest returns. One of these things is tax planning. This will allow you to take advantage of the new changes while cutting down your overall tax bill and maximizing your returns. But what is tax planning exactly?
We’ll explore the basics of tax planning and a number of tax planning strategies for you to use now and in the future.
What is Tax Planning?
Everybody deals with finances—it’s often just done in different ways. One way to work with your finances is through tax planning. Tax planning is a process that helps you reduce the amount of taxes you’ll owe at the end of each year. There are a number of ways you can go about tax planning, but it primarily involves three basic methods: reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.
Why is Tax Planning Important?
The reason why tax planning is important is simple: it saves money and helps you avoid overpaying your taxes. Aside from that, however, tax planning will help you better understand what you’re spending money on and how you can get rewarded for planning for retirement or advancing your education.
Basic Tax Planning Strategies, Know Your Bracket
If you’re ready to start reaping the benefits, it’s important to understand a few basic tax planning strategies first. These will get you started, and as you continue, you’ll start to learn different variations of these strategies that will help you save more.
Increasing Your Deductions
You can also work on increasing your amount of taxable deductions throughout the year. Depending on your line of work, charitable donations, and a number of expenses, your tax deductions could be substantial. Deductions include rental income and expenses , any interest that is paid on your investment property mortgage, charitable donations or gifts, and expenses that are directly related to your job, expenses from investments, , and more. Over the year, these deductions add up. That’s why you need to keep an itemized list of your expenses throughout the year along with any receipts. You can use something online or offline. We recommend setting up a simple spreadsheet and adding line items every time you have a deduction.
Utilizing Tax Offsets
Tax planning is necessary because it allows you to plan for the future. If you don’t plan, you won’t be able to utilize a number of tax credits throughout the year. Tax credits work like incentives and they help you lower the amount of money that you owe in taxes. They don’t reduce your taxable income; instead they can be deducted from your final amount owed. This helps to lower your tax debt substantially.
Finally, if you receive a regular payslip, you can look into increasing your withholding. This helps you avoid owing large sums when tax season comes around and if you go over, you’ll end up getting a larger refund when the time comes.
Since most people and small businesses pay too much in taxes every year, tax planning is essential. If you need help and want to keep more of your hard-earned money in your pockets, don’t hesitate to give us a call us. Our professional accountants are not just any ordinary accountants. We strive to make sure that each and every one of our clients are getting the best attention possible while saving thousands of dollars in taxes each year.