Did you know that without a tax planning strategy you can be one of the 2.2 million taxpayers that filed utilizing standard procedures and over paid taxes close to $1 billion? Although we all heard at some point in time that the US Taxation system provides taxpayers with innumerous tax benefits, the vast majority of us are still overpaying taxes and aren’t even aware of it. The overpayment is not because the tax returns aren’t prepared properly either and yet because they are missing opportunities that can only be discovered through a comprehensive financial planning process.
What is Tax Planning?
Tax Planning is not Tax Preparation! We always like to clarify that tax planning is a completely different concept than preparing and filing your taxes. Tax filing reflects the results of your income and benefits of your tax planning resulting is total taxable income. Understanding the principals of what tax planning entails is one of the most important aspects of financial planning. In general, we can state that tax planning is the analysis of finances from a tax perspective, with the purpose of ensuring maximum tax efficiency. It is through a tax planning that all elements of the financial plan work together in the most tax-efficient manner possible. Tax planning is an essential part of an individual investor’s financial plan. Reduction of tax liability and maximizing the ability to contribute to retirement plans are crucial for success.
How Tax Planning Works & It’s Objectives:
Advanced tax planning allows a thorough review of past tax returns filed and current financial status including but not limited to timing of income, size, timing of purchases, planning for expenditures, selection of investments and types of retirement plans to create the best possible taxation outcome.
Tax planning is a pivotal part of financial planning. Through effective tax planning all elements of the financial plan falls in place in the most efficient manner. This results in channelization of taxable income to different investment avenues thus relieving the individual of tax liability. All in all, the objective of tax planning is to reduce tax liability and attain economic stability.
Importance of Tax Planning:
- The main known reason “Reducing Taxes”
- Most Tax Reducing Opportunities must be planned ahead and not short term
- Tax law changes may greatly impact your tax planning if not updated annually
- Tax reduction deadlines, as they can happen as late as December 31st
Types of Tax Planning:
Tax planning is an integral part of every individual’s financial growth story. No individual will have the same exact tax planning strategy as their financial plans usually differ. However, the majority will fall under the following broad classified planning’s;
- Purposive tax planning: Planning taxes with a particular objective in mind
- Permissive tax planning: Tax planning that is under the framework of law
- Long and Short range tax planning: Planning done at the start and end of a fiscal year respectively
- Retirement tax planning: Planning to determine income goals, risk tolerance and actions as well as decisions to achieve such goals.
With such a complex tax code of over 76,000 pages, every taxpayer’s tax situation is going to be unique. Many may believe that this type of planning is only for those ultra-wealthy taxpayers. However, we are able to customize your tax planning and also apply tax saving strategies that may be viable for you as well.
The beginning of the tax year is a great time to start your tax planning guide. We invite you to meet with us and get your tax planning started to enjoy the savings.