While the term “tax planning” may seem like an insurmountable giant mountain to us, it’s beneficial to embark on an adventurous journey through tax planning under the watchful eye of your CPA.
To begin, let us define tax planning, why it is necessary, and when and how we can plan our taxes:
What does tax planning entail?
- Tax planning is the analysis of a financial situation or plan to ensure that all components work in concert to minimize tax liability.
- Tax planning factors in the timing of income, its size, the timing of purchases, and expenditure planning.
- Among the tax planning strategies available are retirement savings in an IRA and tax gain-loss harvesting.
Contrary to popular belief, tax planning is not synonymous with tax evasion, as tax planning employs legal strategies to reduce taxes, whereas tax evasion involves concealing income/gains from the IRS. Tax estimates are a component of the tax planning process and are not synonymous with tax planning. Tax planning necessitates a thorough understanding of the IRS’s rules and regulations, whereas tax evasion entails concealing a true situation by failing to report taxes owed to the IRS.
Tax planning can be classified into the following categories:
- Short- and long-range tax planning: Tax planning carried out annually to accomplish specific goals is referred to as “short-range tax planning.” On the other hand, long-range tax planning refers to the assessor’s practices that are not immediately repaid. Simply put, short-term planning takes place toward the end of a fiscal year, whereas long-term planning takes place at the start.
- Permissive Tax Planning: Tax planning is considered permissive when it is conducted in accordance with a country’s tax laws.
- Purposive Tax Planning: This is a method of tax planning with a specific objective in mind. It may include diversifying business and income assets based on one’s residential status and, if necessary, replacing assets.
What is the purpose of tax planning?
Tax planning enables us to plan our taxes in such a way that estimates are paid on time, and while filing a tax return, we can avoid paying penalties and interest for failing to pay estimates on time.
Along with lowering our tax liability, tax planning can assist us in making productive investments, restructuring our businesses to save taxes, minimizing litigation, and investing in retirement plans on a timely basis.
Along with personal benefits, timely tax payments contribute to the growth and stability of the nation’s economy.
When and how should tax planning be conducted?
We should begin projecting our year-end income at the start of the year. This can be accomplished with the assistance of CPAs. Once we have projected a reasonable income for the year, we can divide it into quarters and plan how to take advantage of the IRS’s tax reduction policies and provisions. Do not be concerned about how to accomplish this; we are here to assist you. Best in class firms employs skilled CPAs who work to minimize your taxes and also assist you in investing in retirement plans for future benefits that are beneficial not only on a federal level, but also on a state level. Kindly contact us if you require assistance with tax planning, return preparation, portfolio management, or business financials.
In short, Tax planning is the analysis of a financial situation to ensure that all elements work together to allow you to pay the lowest taxes possible. Don’t misinterpret tax planning as tax evasion, as tax planning uses legal methods to reduce taxes while tax evasion involves hiding income/gains from the IRS. Tax planning is deemed permissive when carried out under the provisions of a country’s taxation laws. Tax planning can help us with productive investments, structural changes in business to save taxes, litigation minimization, and retirement plan investments on a timely basis. Do not worry about how to do tax planning, we are here to help you out.