Frequently Asked Questions
A: Tax Planning is the process of arranging your financial affairs by taking advantage of beneficial tax-law provisions, tax credits and increasing and accelerating tax deductions. It is maximizing the use of all applicable tax breaks available under the Internal Revenue Code. This may result in substantial tax savings. Usually, the tax savings take place during more than one tax year.
There are several ways of Tax Planning:
- Short-term Planning: This is planning executed at the end of the income year to reduce taxable income in a legal way. If, at the end of the year, you discover your taxes have been too high in comparison with last year, you can make proper arrangements to get them reduced before the end of the year through tax planning. It does not involve a long-term commitment, but results in substantial tax savings.
- Long-term Planning: This is planning done at the beginning of the income year to be followed for several years. Such planning will not pay off immediately but is likely to help in the long run.
- Permissive Tax Planning. This form of planning takes advantage of existing incentives and tax deductions.
- Purposive Tax Planning. This is planning with the specific purpose of ensuring the availability of maximum benefits through the correct selection of investments, replacement of assets, varying of residential status, and diversifying business activities and income.