What is tax planning? Whether you’re a business owner, contractor, or a W2-Employee, proper tax planning can have a significant impact on your bottom line. In the long term, the difference between the most successful business, and a failed one, can be deduced to poor tax planning and execution.
We all know taxes can eat into your annual income, and everyone wants to pay less of them. “How can I pay fewer taxes” is the number one question you will hear as an accountant, and the answer is always the same. A proper plan.
Tax planning is a legitimate way of reducing your tax liability over the duration of any given fiscal year. It helps you utilize tax exemptions, deductions, and benefits offered by your government to those who take advantage.
In simplest terms, it is the analysis of your financial situation and the pinpointing of money-saving opportunities, from the lens of a tax expert.
Where does Tax Planning fit in?
Tax planning is a focal part of an overall comprehensive financial plan. Unless you live in a jurisdiction that is not subject to tax (there exist few if any) then planning to save the most money on taxes is critical. Doing so while remaining in compliance with local and federal regulations is the benefit of partnering with a trusted advisor.
What are the advantages?
- Saving Money: Going through your financial plan at the beginning of the year whilst pinpointing tax-saving opportunities and planning around this is key.
- Minimize litigation & ensure compliance: Paying the taxes that you must pay, while avoiding ones that you don’t ensure a smooth interaction between the tax-payer and the tax-collector. As we know, the relationship between the two is latter attempting to extract the maximum amount possible, and the former wanting to save as much as possible.
- Financial Productivity: Channeling money from unnecessary tax burdens frees up capital to be used for business expansion and growth.
“The golden rules of planning taxes”
- Spread the taxable income among various members in your family
- Take full advantage of all tax exemptions allowed under the law
- Take full advantage of permissible tax deductions and rebates available on stipulated tax-saving investments;
- Make optimum use of tax-exempted incomes
- The simpler the planning, the smarter it is.
What are the types of planning?
When looking at tax planning, one must take into consideration the short-term, as well as the long-term. There are many different types of planning but these are the two “high-level” categories:
- Short-Term Planning: In this methodology, tax planning is commenced & executed at the end of the fiscal year. Business owners resort to this planning in an attempt to limit their tax liability legally when the fiscal year concludes. This method does not entail or explore long-term commitments. However, it can still result in substantial tax savings.
- Long-Term Planning: Long-term tax planning begins at the beginning of the fiscal year and creates a plan for the tax-payer to follow throughout the remainder of the year. Unlike planning for the short term, this may not yield immediate results, however, you may save even more in the long term. Additionally, responsible businesses and tax-payers plan in advance, to avoid potential shortfalls later.
In summation, it is our view that every citizen has the right to take advantage of all tax incentives provided by the state and federal government. This is money that you worked hard to earn, and the more of it you keep, the better. Therefore, through prudent tax planning and evaluation, not only is income-tax liability reduced, but you will have more capital to ensure your family’s safety and grow your wealth.
The analysis may be complex, and some might say this is by design, but thankfully you have partners at BSM Accounting who do this for a living and love it. There is no better feeling than saving a client a bunch of their hard-earned money. Just ask some of our existing customers!
Book a call with us today and learn more about how you can save on your taxes while building a financial plan.