What is a Tax Plan and why you need one.

Tax Planning: The Key to Lowering Your Tax Liabilities

As good citizens, we always have to pay our taxes to the government. However, it’s no secret that most of us don’t like to use a portion of our hard-earned money to pay our tax obligations. What most people aren’t aware of, is that you can plan ahead for your taxes to ensure that you are paying the lowest tax possible.

What is Tax Planning?

To put it simply, tax planning is a method of analyzing your financial situation and creating ways to minimize the taxes you pay. This is done by claiming your tax exemptions, benefits, deductions and rebates.

An effective tax planning uses all legal means to reduce your tax liability. To some extent, you can even pay zero federal taxes, like how Amazon paid no federal income tax in 2018 [https://www.usatoday.com/story/money/2019/02/15/amazon-pays-no-2018-federal-income-tax-report-says/2886639002/] despite soaring profits. This is completely legal but can only be done through proper planning beforehand.

Types of Tax Planning

1. Purposive Tax Planning

Planning your taxes with an objective or purpose is what’s called the purposive tax planning. This revolves on using tax-saver instruments to achieve the goal you have in mind.

2. Permissive Tax Planning

Tax planning that falls under the framework of the law is what’s called permissive tax planning. This type of planning requires an in-depth understanding of the current laws that can lower your taxes.

3. Long-Range Short-Range Tax Planning

As the name implies, this tax planning focuses on time. Short-term tax planning is for people or business owners who only want to lower their taxes for a specific time, mostly for a few years. However, it is still better to apply long-term tax planning to maximize the benefits you gain from tax planning.

Why You Should Have Your Own Tax Planning?

Speaking of getting the benefits of tax planning, here are a few reasons why you should start tax planning now.

1. Lower Your Taxes

The most obvious reason why you should have your own tax planning is to lower the taxes you pay. That extra money you can save from lowering the taxes you pay can help a lot in your day-to-day lives. You can buy more goods and services, or you can even save up the money for future use.

2. Retirement Benefits

People have a longer life span now, with an average life expectancy of 78.93 years. Living longer is a good thing, but if you failed to plan for your retirement, you might be facing a crisis. This is why everyone should always plan for their retirement age.

With tax planning, you can decrease the amount of taxes you pay and put it in your savings account for the future. You can also use the extra money for long-term investments, or other things that can generate you more income.

3. Better Financial Planning

Most people know basic financial planning such as budgeting and saving. With a more advanced financial plan that includes comprehensive tax planning, you can manage your finances better. This leads to a more comfortable lifestyle for you and your loved ones.

4. Increase Income for Businesses

If you are managing a business, reducing taxes can help you a lot with keeping your business afloat. Owners of small businesses are often too busy with managing their company that they do not utilize a few strategies that can help them lower their taxes, and thus, increase the net income for their business. With tax planning, you can create a few strategies that can lower your business’s tax liabilities.

5. Ensure Economic Stability

You might think that tax planning strategies mean that you are not giving enough money to improve your country. However, that is not the case. Since most tax exemptions and credits are created to keep the economy running, you are still doing your duties as a citizen.

How to Start Tax Planning? Compute All Your Income

You should always start with computing your total income. This is the sum of all your gross income from your salary, part-time work, business, commissions, investments, and other things. Even gifts such as inheritance can be considered as an income.

Start a Filing System

It is always better to have all your documents organized in a neat filing system. This can help you do your tax planning strategy better. All the records of transactions and receipts can have an effect on your tax. Sometimes, people often do transactions that can be used in their tax planning strategy, but forget about it after a few months.

Do A Lot of Research

The key to effective tax planning is to be knowledgeable about everything that affects your taxes. Knowing the laws in your country can help with reducing your tax liabilities. You should also be aware of the tax deduction requirements and prepare them beforehand.

You can also use tax-saving instruments to reduce your tax liability. This can come in the form of Life Insurance, Health Insurance, Retirement Account, or other instruments that offers tax exemption.

Tax benefits and credits can also help you save taxes. For example, there are countries where they encourage people to install solar panels and have laws that give tax credits to households that installed one.

Knowing the federal laws in your country is the key to creating an effective tax planning strategy. Since there are different laws in each country, you have to do your own research and apply the methods that you can so that you can save taxes.

Tip: Hire a Professional

It’s no secret that people hate doing taxes. Incorporating tax planning to their financial plans can be a little too complicated for most people, especially if they are busy with their own careers. This is where professional accountants can help you.

By having an expert give you advice on how you should do your tax planning, you are sure that you can create the best possible way to lower your tax liabilities. Hiring a local certified public accountant can help you create your tax planning strategy.

Final Thoughts!

Tax planning can be a daunting tax for an average person. But with the right information and proper planning, you can save a lot of money that you can use to further improve your life.