What is tax planning?
Tax planning is applying strategies to maximize your deductions and minimizing your tax liability for the tax year while complying with deadlines and tax laws.
Why is tax planning important?
- It is all about reducing your tax bill. It is important not only if you own a business or if you are self-employed, but also if you are a W-2 employee.
- It helps you go through deadlines. Tax planning means you are well prepared to deal with tax liability contingency and in no danger of suffering deadline dread. Your tax accountant should ensure you never get a late penalty.
- Tax laws change every year. Tax planning allows you to ready for these changes, whether minor or major, and make decisions about how you wish to deal with them and how they will affect your taxes.
- It helps you get the most our of your entitlements. You should not wait until the very last second to try to use a tax benefit. Effective tax planning requires that you take the time allowing yourself or your tax accountant to study your current tax situation and make the appropriate decisions toward the current year. Smart tax planning takes place throughout the year, not right before the day before your taxes are due.
Should you hire a tax accountant to perform tax planning for the year?
Hiring a tax accountant is always good for tax planning, enables you to save money. A dedicated accountant who carefully analyze your tax situation throughout the year in advance of the tax reporting will be able to help you maximize your deductions and use all tax credits you are entitled for.
A good tax accountant regularly follows updates on regulatory changes and tax laws and will be able to implement the new change that would bring you benefits at early state and increase your gain.
A good tax accountant can tell you how each decision or transaction at which timing will affect your overall tax situation. The end goal is to lower your tax liability, so you can invest more on the other things you care for.
Key things to consider
- Deferring: Timing your income and expenses appropriately is a key component of tax planning. An expense in the future is cheaper than an expense right now. Similarly, income now is more valuable than income in the future.
- Taking full advantage of all deductions and credits available to you
- Be aware of tax credits that may be available to you
- Decision to use standard deduction or itemized deductions
- Structuring your business in a way that minimizes taxes
- Plan the tax-deductible expenses that you would be leveraging for current tax year
- Review your tax situation to identify additional credits or deductions
- Keep good records of your documentation
- Employ your losses to offset your gains
- Put your investments in the right type of account
- Income splitting: shift money to other family members who pay taxes in a lower tax bracket
- Disguising: converting money from one type of income to another that is taxed at a lower rate
- Take advantage of the qualified business income (QBI) deduction
- Defer capital gains by reinvest funds into a Qualified Opportunity Fund or make like-kind exchange
- Set up or contribute to your retirement
If you need a dedicated consultant to help you with your tax planning, don’t hesitate to reach out to us.