Did you know that by taking advantage of specific tax planning strategies, you could reduce the amount of money you pay to the government every year? Tax planning is extremely important for individuals, families, and businesses because it can save you money. This extra money can be used for your retirement, your legacy, and to reinvest. Tax planning specialists help you take advantage of exemptions, deductions, and other benefits offered under the tax code.
What is Tax Planning?
Tax planning is the process of making financial decisions with the goal of minimizing tax liability. Tax planning strategies can be used to reduce income tax, capital gains tax, estate tax, gift tax, and more. At the end of tax season, these strategies can result in thousands of dollars more in your pocket, depending on your situation.
Your tax plan may include several strategies. For example:
Transferring retirement assets from a Traditional 401(k) to a tax-advantaged account, like a Roth IRA
Taking advantage of credits, like the child tax credit, earned income tax credit, or solar credit. Tax credits lower your tax obligation dollar for dollar. For instance, a $1,000 tax credit reduces your tax obligation by $1,000.
Taking advantage of tax deductions, which represent exact costs you've incurred that can be taken away from your taxable income
Deferring capital gains taxes through a 1031 exchange, Delaware Statutory Trust, installment sale, or qualified opportunity zone fund
Donating to charity and deducting that amount from your taxable income
Putting money into a 529 plan for your children's college education, or using a specific life insurance account to pay for education
Tax planning can be complex, and it's important to work with a qualified tax professional to make sure you're taking advantage of all the opportunities available to you.
Advantages of Tax Planning
Tax planning has many short-term and long-term benefits. In the short-term, tax planning can result in a bigger tax refund. It can help you avoid costly mistakes, such as accidentally overpaying your taxes or failing to claim a deduction that you're entitled to. In addition, good tax planning can help you keep your financial affairs organized and make it easier to file your taxes each year.
In the long-term, it can save you, your family, and your business thousands of dollars, allowing you to save for what matters most. For example:
Building a college fund: As tuition prices continue to skyrocket, it's becoming increasingly important for children to have a college fund. The less you pay in taxes, the more income you have available to put toward your children's education.
Bolstering your business: Effective small business tax planning will allow you to have more spendable income to purchase the resources you need to run your business.
Saving for retirement: Combining effective tax planning strategies with effective retirement planning strategies can help ensure that you spend your elder years comfortably.
Providing for your heirs: If you have an estate large enough to incur estate taxes, proper planning can make a noticeable difference in your family's finances.
Tax Planning Strategies
A key objective of tax planning is to funnel money from taxable sources into different income-generating plans. By doing this, you are ensuring that your funds are being used in the best way possible for productive purposes. When it comes to tax reduction, most strategies can be boiled down to six basic principles:
Income splitting. When you shift your family's income around to members or entities who are in lower tax brackets, you lower the taxes for your entire household.
Shifting income. Certain types of income (such as bonuses, dividends, and year-end payments) can be moved from one tax year to another to ensure they'll be taxed at lower rates.
Shifting deductions. Some expenses can be placed in either the current year or next year, depending on what will offer the greater tax benefit.
Deferring tax. Putting your money in certain investments or making contributions to a pension plan allows you to postpone the tax on some income until a later date.
Tax-deductible expenditures. Certain expenses may be tax deductible if you meet specific requirements in the Tax Code. Sole proprietors and small business owners especially should be aware of this strategy.
Tax-exempt investments. There are a variety of investments that can provide you with income that is exempt from federal or state taxes, or both. Many mutual fund investments, for example, offer tax advantages.
A tax professional can keep you up-to-date on how changes in the tax code may alter your finances.
Hiring a Tax Professional
While do-it-yourself tax preparation software has made it easier than ever to file your own taxes, those programs don't provide personalized tax planning services. If you're self-employed, a small business owner, or a high-net-worth individual, you could benefit from speaking to a tax specialist. Ohio Tax Advocates are your tax preparers, tax analyzers, and tax planners. We work tirelessly to keep your money safe.
Keep in mind that the sooner you start planning, the more options you'll have available to you during tax season. If you wait until the last minute, you might not be able to take advantage of certain deductions or credits.
Also, don't forget that tax laws can change from year to year. This means that what worked last year might not work this year. The professionals at Ohio Tax Advocates stay up-to-date on the latest changes in the tax code so you don't have to. Call 614-356-8647 to schedule a consultation. You could potentially save thousands of dollars.