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.
A: With tax preparation, you are looking at the past. Once December 31st of each year is over you can’t change history. Anything you could have taken advantage of to reduce your tax liability is over. All you can do is sit and wait for all your tax documents (i.e., Form 1099s, and W2s) to arrive and then hand them over to your Tax Preparer to file by April 15th. Or you can do it yourself. Another option is to file for an Extension if your information is not ready on a timely basis.
With Tax Planning you are taking a proactive approach. The focus is on today and the future. For example, receiving a huge refund year after year reveals a lack of intelligent tax planning. That refund is not a savings account and, therefore, earns no interest. You could have used that money throughout the year to feed your family, invest it in your retirement plan, save for a college education or even start a side business.
A: No. The truth is even a lower-income taxpayer can benefit from tax planning because it’s not how much you make…it’s how much you keep. Those who work as independent contractors will discover that tax planning helps them develop a financially sound practice of keeping track of their earnings and paying the quarterly estimated tax payments. That way they are not caught by surprise come tax filing time. Tax planning also helps them to avoid the underpayment penalty on estimated taxes. In fact, all taxpayers want to avoid unnecessary underpayment or overpayment of tax.
Investing in Tax Planning to avoid or put off paying taxes until a later date gives you, the taxpayer, discretionary money to spend or invest. A tax plan allows you to take as many tax breaks as possible and works within the tax law to increase allowable deductions and credits. If you find yourself at tax time thinking you should have itemized more deductions or put off a large transaction, you’re a prime candidate for the benefits of tax planning. Simply put, tax planning equals fewer surprises come tax preparation time.
A: While almost everyone can benefit from Tax Planning the practice can prove particularly advantageous for the following:
- Business Owners: As a business owner, how you register your business as a legal entity can have a huge impact on your taxes. You can operate your business as a Sole Proprietor, a Corporation, or a Limited Liability Company. Knowing the pros and cons of each designation is key to optimizing your tax strategy and maximizing your profits, especially considering the new tax laws.
- Real Estate Investors: Tax planning can help determine the best way to hold your properties to maximize tax advantages.
- Long-Term Investors: Tax planning can help you decide how to structure your portfolio and benefit from tax advantaged investments.
