desk covered with tax papers and books

What is Tax Planning?

Paying taxes may not be quite as inevitable as death, but they come close. When it comes to your taxable income, proper tax planning can help you avoid a whole litany of problems, while making sure that you minimize your tax liability and keep more money in your pocket. 

If you are wondering how to achieve maximum tax efficiency on your federal income tax, or any other tax bills, purposive tax planning is key. If you aren’t sure where to begin, this basic guide will answer the questions “what is tax planning?” and show you how effective tax planning can lead to tax savings and protect your overall financial situation. 

So, What Exactly is Tax Planning?

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Taxes come in many forms and some of them can become quite complicated. In all cases, they form a key part of your annual spending and can easily eat into your earnings and savings if you don’t plan well. This is essentially what tax planning helps with. It’s the process of soundly organizing your finances in a way that lets you legitimately reduce your dues to the government.

With tax planning, the most fundamental objective is to find substantial tax savings by leveraging tax credits, tax deductions, and other means, to reduce your tax obligations to federal, state and local governments while being financially sound. Beyond the immediate tax benefits, tax planning also supports the development of a long-term financial plan, leading to better financial stability, civil legal protection and long-term asset protection. 

The Benefits of Professional Income Tax Planning

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Professional tax planning offers priceless peace of mind. While it cannot eliminate the need to pay taxes entirely, there are ways to reduce your tax liability while benefiting your financial planning. 

Maximizing Returns

Tax authorities and government laws generally design their tax exemptions in ways that encourage strong reinvestment of earnings. Because of this, you or your tax planning consultant can structure your income for stable reinvestment of funds. The benefit of such tax saving investments is that it tends to help you earn more money from your assets, aside from just saving through reduced annual tax burdens.

Civil Lawsuit Minimization

You absolutely can be sued or criminally charged by your friendly local or federal government representatives, and especially by those who want their fair share of your earnings.

Permissive tax planning can dramatically reduce the odds of the government taking you to court and their chances of winning a judgment against you if they do. This causes you to avoid legal expenses while also simply keeping more of what you earned.

Long-Term Economic Stability 

When you plan your taxes carefully and legally, you can ensure that more of your money can be reinvested into assets for the long run. Almost by definition, tax management revolves around deferring or reducing tax liability through strategic investment choices.

A major consequence of this is that it makes you a better asset management and growth planner for a stable financial future. For example, by claiming a capital loss on your tax returns, you can actually find tax relief and could offset future capital gains tax obligations.

Types of Tax Planning Strategies

tax statement papers

When it comes to global tax services, there are many kinds of tax planning strategies and tax saving instruments. Covering all of them would require much more than a brief guide. Instead, you should consult with a tax planning consultant, tax attorney or CPA on the specifics for your situation. With that said, some of the basic methods that apply to most situations involve the following.

Short-Range Tax Planning

With this part of tax minimization, you use strategies that help reduce your tax burden at the end of each fiscal period (annually, quarterly, etc). You can practice short-term tax planning by allocating yearly gains and earnings for exemptions, discounts or deferrals on annual taxes.  For example, annually reinvesting earnings into investment accounts lets you defer taxes on those earnings.

Long-Range Tax Planning

Much like short-term tax planning, its long-term variant lets you and your consultant move your assets and gains into long-running investments or asset types that let you defer tax payments until years or decades have passed.

With this strategy, your final tax payments also tend to be smaller than they would be if you’d used your money differently. Retirement funds are a great example of long-term tax planning. They let you defer tax on accumulated earnings from contributions to them for decades.

Retirement Tax Planning

With retirement tax planning, your strategy is to defer as much as possible of your tax liabilities throughout your working years so that you can enjoy the savings with a smaller postponed tax payment once you’ve reached a certain age. It’s a type of long-term tax planning.

Estate Tax Planning

Estate tax planning helps make sure that your family and loved ones benefit from your assets as much as possible, working towards this goal by giving you strategies that preserve your estate’s after-tax value as much as possible once you pass on.

Business Tax Planning

Your business taxes will be unique in many ways compared to your personal tax obligations. Often, the unique rules around how businesses are taxed or exempted from taxes can be used by individuals to preserve assets legally for the sake of personal use. Business tax planning consultants can help you achieve this legally while also helping you create a whole new list of annual deductions on taxes that your business can offer.

Finding Professional Tax Help

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A tax planning consultant can save you an enormous amount of time and money on how you structure your finances for better asset protection.

In fact, with the complexity of modern tax laws, getting help from experienced CPAs, accountants, tax attorneys and tax consultants is now more important than ever. 

Contact TPI Group to consult with experienced tax planning experts before preparing your income taxes!