Personal and business taxes can be too much for some people to understand. And if they don’t have a financial plan in place, they can experience many issues, including the ever-frightening letter from the IRS.
That’s why it’s important for individuals and businesses to take some time and make a plan to effectively manage their money over time. There are a plethora of tax planning strategies out there to help you reduce your taxes and save money over time.
If you’re thinking, “What is a tax planning strategy?” We help high-income individuals and business owners take advantage of tax deductions through smart planning.
What is Tax Planning?
Tax planning involves taking the time to create or analyze a financial plan for optimal tax efficiency. You will look at finances, assets, capital gains, liabilities, as well as the timing of purchases throughout the year.
The goal is to optimize your taxes both in the short and long term. By using effective tax planning strategies, it is possible to create the best possible outcome for your financial future. Tax planning takes into account a variety of factors:
- Timing of income
- Size and timing of purchases
- Planning for other expenditures
Tax planning will affect other financial decisions as well, including the type of retirement plan you should choose and the best investments for you to make. Everything has to be compatible with your tax plan while complementing your tax status and deductions.
Determine Your Tax Bracket
Effective tax planning starts by knowing what tax bracket you fall under because the United States has a tax system divided into seven brackets:
To figure out your tax bracket, subtract all tax deductions from your taxable income. Unfortunately, things aren’t as simple as multiplying your tax bracket by your taxable income. The government divides your income into different portions, applying the corresponding rates to each portion. The higher your income is, the higher the tax rates will be for each additional dollar earned.
TPI Group helps high-income individuals with their income taxes and creates strategies to help them qualify for the maximum amount of tax credits. Taxpayers almost always benefit more when they work with a professional.
What are Some Tax Planning Strategies?
From retirement plans to donations to capital losses and gains, you can find the right strategy for your situation and experience some financial relief when you file your tax return.
To reduce overall taxable income, individuals and businesses can opt to make contributions to a retirement plan:
- Traditional IRA: Most individuals can minimize their gross income by up to $6,500. However, if a filer is 50 or older, they can receive a tax reduction of $7,000, while filers under 50 can receive a reduction of $6,000. Bear in mind that there are some qualifications that filers must meet.
- 401(k) plans: Larger companies and corporations use this kind of plan, however, a self-employed individual can also open a 401 (k). Participating employees can have part of their income be automatically added to their 401(k) plan. This plan differs from the Traditional IRA because its contribution limit is higher.
Some people can qualify for a tax break when they make donations to charity. Tax deductible donations can be either money or goods to an organization that qualifies for tax exemption.
On average, taxpayers can deduct as much as 60% of their adjusted gross income using charitable donations. This deduction will vary according to the type of contribution and organization. If the donation is in cash, you may be able to claim 100%.
Capital gains consist of any profits reaped from selling capital assets, such as shares of stock, a business, a boat, even a work of art. Capital gains are most often taxed at a lower rate when they aren’t included in taxable income. Once a capital asset is either sold or exchanged for a higher price than its purchase price (with the addition of commissions and the cost of improvements minus depreciation), it becomes a capital gain.
When capital assets are sold at a price that’s lower than their basis, they become capital losses. A capital gain or loss has to be held for over a year to qualify as long-term whereas the gain or loss is considered short-term if held for a year or less.
Because the tax on some capital gains can be high, you can offset the amount of tax owed by applying the losses. While it may seem counterintuitive at first, sometimes selling stocks and assets at a loss is a way of managing short and long-term gains and reducing the tax.
How are they taxed? Generally, you will pay lower taxes on long-term gains compared to short-term ones. Each tax rate fluctuates on a yearly basis, so it’s important to speak with your tax advisor to stay informed.
Get Help with Tax Planning and Accounting from TPI Group
Was this past tax year a bit of a mess, especially with the pandemic forcing many people to work from home? A tax specialist can help you design a smart financial plan while applying effective tax planning strategies.
TPI Group can assist by reviewing your documentation, showing you how to manage your expenses and payments, as well as work with the IRS if there are any problems. We take the confusion and headache out of the process and can prevent a large tax bill showing up in the mail.
Improve income tax efficiency with TPI. Speak with a tax accountant today!