Tax planning is the process of forecasting our tax liability then making plans and adjustments to reduce it.
By tax planning, Sherman Oaks Accounting & Bookkeeping powered by One Source Services, Inc. helps clients defer and avoid taxes by taking advantage of tax-law provisions that benefit the taxpayer. We can increase and accelerate tax deductions and credits, using all the tax breaks that we qualify for under the Internal Revenue Code.
Tax planning requires us to create scenarios that are as tax efficient as possible. Investors and businesses might consider how much income and profit they bring in, what kind of purchases they make and when, what types of insurance coverage they have, and the different investments they make. These factors impact many things including the types of tax deductions they qualify for and which tax bracket they fall into.
By artfully arranging financial affairs in ways that postpone or avoid taxes, people employ tax-planning strategies that give them more money to save, invest or spend.
Tax planning and financial planning are closely related.
Taxes are such a large expense over the course of a taxpayer’s life that if you become financially successful, taxes are probably your single biggest lifetime expense. Therefore, it’s critically important to financial planning that taxpayers plan to reduce their taxes. Especially when making large financial transactions or life events, such as selling a home or getting married, you cannot ignore their effects on your taxes.
If you did not consider tax-smart alternatives, you could cause permanent differences in your tax liability that could potentially impact your financial quality of life. Bad tax decisions can happen, even in what seem to be intelligent transactions.
Tax planning has motivated many individuals to reduce their tax bills by contributing to retirement plans. Retirement accounts such as IRAs are very important to taxpayers who are saving for retirement because assets in a traditional IRA, for example, can grow tax-free.
There are numerous retirement plans that may be used to reduce taxes. For instance, 401(k) plans are popular with large employers and allow participants to automatically contribute to the plan via pre-tax paycheck deductions. The big difference between a 401(k) and an IRA is that the contribution limit of a 401(k) is much higher than that of an IRA.
Especially with the passing of the 2018 tax overhaul bill, federal income tax rules are more complicated than ever and tax-planning benefits are even more valuable than before.
Tax planning can make a major difference in an individual’s present and future standard of living. For example, someone who is investing in a retirement fund year after year could end up with a portfolio that is worth much more (because of tax planning) than it would be if they’d made the same contributions to an account without tax-reducing benefits.
Plan transactions with taxes in mind and avoid making impulsive financial decisions.
Seek professional tax advice before jumping into significant transactions; you may end up saving more money in taxes than you spent on the professional.