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What is Tax Planning?

Updated: Nov 10

Tax planning is the process of legally minimizing your tax liability. This can be done by taking advantage of tax breaks and deductions, or by structuring your finances in a way that minimizes your taxable income. Effective tax planning can save you thousands of dollars every year, so it's well worth the effort. If you're not sure where to start, consider talking to a tax professional or financial planner. They can help you identify opportunities to reduce your taxes and develop a plan to make the most of those savings.

Benefits of Tax Planning

There are many benefits to effective tax planning. Perhaps the most obvious is that it can save you a lot of money. But there are other advantages as well, such as:

  • Reducing your stress: Tax time can be stressful, especially if you're worried about owing money to the government. Effective tax planning can help reduce your anxiety by ensuring that you're taking advantage of all the deductions and credits you're entitled to.

  • Giving you peace of mind: Good tax planning gives you the peace of mind of knowing that you're doing everything you can to minimize your tax liability. This can be a valuable feeling, especially during uncertain economic times.

  • Making it easier to save for retirement: Certain retirement savings accounts such as Roth IRAs can offer significant tax benefits. Also, if you're able to lower your taxable income through tax planning, you'll have more money available to save for retirement.

  • Improving your cash flow: Many people find that their tax refunds give them a much-needed financial boost. However, you could also be robbing yourself of a bigger refund by paying much more in taxes than you need to.

There are many other benefits of tax planning as well. These are just a few of the most popular. If you're looking for ways to save money and reduce your stress, consider making tax planning a priority. It could be the best decision you make all year.

Tax Planning Basics

Most tax-cutting strategies are based on these six key principles.


  1. Income splitting. Taxes are lowered for the entire family unit by distributing income among several family members or legal entities. This strategy allows more of the family income to be taxed at lower rates.

  2. Shifting income. Some types of income (such as bonuses, dividends, and end-of-year payments) can be moved to a different year so that they will be taxed at lower rates.

  3. Shifting deductions. Certain deductible expenses, like those for an automobile purchase or a mortgage, can be paid in one year or the next. Place them in whichever year the tax benefits are greater.

  4. Deferring tax. You can defer the tax on some income by putting your money into certain assets and making pension plan contributions.

  5. Tax-deductible expenditures. If you adhere to specific requirements in the Tax Code, you may be able to deduct certain expenses from your taxes. For example, if you purchase items strictly for business purposes and within the IRS guidelines, you may be eligible for a tax deduction.

  6. Tax-exempt investments. You can select investments that produce tax-exempt income at the state and/or federal level. Many mutual fund investments come with tax advantages.

Tax Planning Mistakes You Might Be Making

Here are five common tax planning mistakes that people make year after year, and how you can prevent these from happening to you.

  • Doing nothing about your capital gains. Many investors have grown their wealth to a point where capital gains problems arise. Capital gains can really become a problem if you're considering leaving an inheritance to your children and grandchildren. Currently, if you die with a capital asset (such as a stock, business, or real estate) that asset goes on to your beneficiaries at the value that it existed at the time of your death. If the U.S. government decides to get rid of this step-up in basis in the future, there will be taxes due on the estate that is passed down to the next generation. Many beneficiaries might need to sell the home or some of its contents to pay the taxes. You shouldn't wait until there is a change in tax law to take action. It takes time to make tax and estate planning changes.

  • Keeping too much retirement money in a brokerage account. In Washington, there is talk of raising the capital gains rate for people that plan on using those capital gain monies as income during retirement. If the capital gains rate does increase, which is likely to happen given the state of our economy, you may find yourself in a completely different tax structure going forward. For example, instead of your money being withdrawn at a 15% tax rate, you may be looking at 28% instead. That's a major income cut. The time to restructure your portfolio is now.

  • Not taking every tax deduction available to you. Tax planning isn't just about what could happen in the future, it's also important to take a look at the present. Are you taking all the tax deductions you could be taking? Even if your current accountant says you can't take certain deductions, a second look at your tax return could save you thousands of dollars.

  • Not turning your hobby into a legitimate business. Starting a business is certainly scary. But, if you're already putting in the time and effort, why not make it official? You don't have to be making a profit to be a business. If you have expenses and can show that you have the intent of making a profit, you can claim those costs as deductions on your taxes.

  • Not thinking about future estate taxes. Here is an example we often use to illustrate how future estate taxes may affect you. Say you're ready to retire, and you have a portfolio full of residential properties. You want to give these properties to your children when you die - but you're also leaving them with a large tax bill in the process. Especially if your net worth is over the exemption amount. Currently, in Washington, there are talks of reducing the estate tax exemption even further—to about $3 million. If your estate is over $3 million (meaning your total assets: life insurance, property, investments, etc.), you may be looking at a 40%-50% estate tax! This tax doesn’t go away when you pass away, it trails the property. Ask yourself if your children are well-equipped to pay this tax when you pass away.

If you have any estate or tax planning concerns, we would be more than happy to help. Here at Ohio Tax Advocates, not only can we do your taxes for you, but we go one step further. We analyze them too and always look for new opportunities to save our clients money by utilizing legal loopholes. A consultation with us could end up saving you tens of thousands of dollars in the long run. Call our office at 614-356-8647.

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