Billions of dollars are overpaid in taxes each year, and many individuals and businesses are left scratching their heads, wondering how they ended up with such a hefty bill. But fear not, with proper tax planning, you can keep more of your hard-earned money in your pocket.
In this blog post, we’ll explore the five essential steps of general tax planning, and make a compelling argument for their importance in minimizing your tax burden.
The first step in successful tax planning is understanding your current tax situation, specifically your tax bracket. A tax bracket is a percentage rate at which your income is taxed, depending on where it falls within predetermined ranges.
For instance, if you are a single filer in the United States and your taxable income is $50,000, you are in the 22% tax bracket. However, not all your income will be taxed at that rate – only the portion that falls within that specific bracket. Take the time to research and understand the tax brackets in your country to determine where you currently stand.
Action Tip: Look up your country’s tax code online and find out which tax bracket you fall into.
If you’re having difficulty navigating the complexities of tax laws and preparing your own taxes, it might be in your best interest to hire a qualified tax professional. A licensed tax preparer or accountant can help you identify potential credits and deductions that you may not have known about and ensure that all of your paperwork is filed accurately and on time. When choosing a tax professional, it’s important to make sure they are qualified and experienced in the areas relevant to your needs.
Action Tip: It’s also beneficial to look for a local tax professional. For instance, if you live in New York, look for the best tax accountant NYC has to offer. Local tax accountants know the local laws and regulations better and they can help you make the most out of the current tax season.
Deductions and credits are powerful tools to reduce your taxable income and subsequently reduce your tax liability. Deductions work by reducing the amount of income subject to taxation, while credits are a direct reduction of your tax bill. It is crucial to explore and utilize all deductions and credits relevant to your specific situation.
For individual taxpayers, common deductions include:
- Home mortgage interest
- Charitable contributions
- Medical expenses
- Retirement plan contributions
- Educational expenses
For businesses, common deductions include:
- Business expenses (such as advertising, insurance, and rent)
- Depreciation of assets
- Employee benefits
Action Tip: Keep detailed records of all expenditures that could qualify as deductions or credits, and consult with a tax professional to ensure you’re maximizing their potential.
Tax-advantaged accounts, such as retirement plans (401k, IRA), Health Savings Accounts (HSA), and education savings plans (529 Plans), offer distinct tax benefits. They allow you to grow your investments on a tax-deferred basis, meaning you won’t pay taxes on the earnings generated within the account until you withdraw the funds.
By contributing to these accounts, you are lowering your taxable income today, while also saving for future essentials like retirement or your child’s education.
Action Tip: Research the different types of tax-advantaged accounts available in your country, and establish the ones that best suit your financial goals.
Tax loss harvesting is a strategy often used by investors to minimize capital gains taxes. It involves selling off underperforming investments to offset gains from well-performing assets during the same tax year.
When it comes to tax loss harvesting, timing is everything. To maximize the benefit of this strategy, investors should only sell off assets at a loss when they’re sure they won’t need them in the future. If the asset could be useful for other investments or goals, then it would be more beneficial to hang onto it and wait until later to harvest the tax savings.
Action tip: Tax loss harvesting should be done towards the end of the tax year when investors know their total gains and losses for that period.
Overall, with the five steps to general tax planning in mind, you can effectively minimize your tax burden and get your money’s worth for your hard-earned income. Remember that an important aspect of any good financial plan is to monitor and review everything regularly, especially when it comes to taxes. Regularly reviewing your finances will allow you to take advantage of changes in the law or happenings in current financial markets that can help reduce your taxes. Ultimately, these five steps enable us to be proactive on our taxes so we can protect our assets while affording us more options for enjoying our income with less stress.