Tax Planning is finding out how much tax you will be paying before you file. The purpose of planning taxes is to minimize your tax liabilities or the amount you owe the IRS. There are several approaches to tax planning, some of which can be done through the use of allowances, exclusions, exemptions, and deductions. By using tax planning strategies, you’ll have more money left over to save or invest.
Tax planning helps to improve your financial situation year after year. Here are a few reasons tax planning is necessary:
Tax Planning Leads to Financial Planning
Tax planning is paramount to financial planning. If you earn high figures, your taxes will likely be your biggest yearly expense. Obviously, the less tax you pay, the more money you’ll have left at the end of your fiscal year. When it comes to meeting your short- to long-term goals, financial planning is the method that will help you succeed. The more you save on taxes, the faster you can achieve your financial goals.
Education Costs
Tax planning can help reduce your yearly education costs. If you’re a qualified taxpayer, you can reduce the tax-payable amount by up to $2,500 a year under the American Opportunity Credit. Another possible tax-saving opportunity is the Section 529 Plan account, which allows you to save for future education costs in two ways: through prepaid tuition or an education savings plan. The distribution from the account is tax-free to the beneficiary. The tax benefits of the Section 529 Plan you’re eligible to receive depend on your state.
Examples of state benefits include deducting contribution amounts from your income, non-taxable account withdrawals, and tax-free savings. For more information, check with your state.
Deductions
Some taxpayers are subject to alternative minimum tax or AMT, which limits the amount of tax benefits high-income earners can claim to make sure that a minimum amount of tax is paid. As a result, high-wage earners may lose the benefit of their deductions. In that case, it is advisable to delay or accelerate part of deductions or income, whichever is possible to avoid affecting your AMT.
Real Estate
Proper tax planning strategies are extremely important as estate laws keep changing. Tax planning can help lower your estate taxes.
Retirement
Tax planning will prove beneficial when it comes to preparing for your retirement. You can contribute to pre-tax earnings that can grow tax-free over time. You can also deduct from your simplified employee pension (SEP), individual retirement accounts (IRAs), or other plans.
Get Professional Tax Planning Advice from TPI Group
Your CPA has in-depth financial knowledge that can help you make smart choices when it comes to tax planning. Our team at TPI Group is dedicated to providing our clients with professional tax planning advice to ensure the lowest possible amounts owing. Contact us today for our expert tax planning services.