The Importance of Tax Planning

Many people use the term “tax planning,” but it is often misunderstood. It is the art of learning how to manage your affairs in ways that postpone or avoid taxes. Skilled tax planning means more money to save and invest, and it can make the tax season more of a financial boost instead of a financial burden. Tax planning is deferring or avoiding taxes by taking advantage of certain tax-law provisions, increasing deductions and credits, and by taking advantage of all applicable tax breaks that are available under the Internal Revenue Code.

Strategies are typically designed and employed to achieve goals--a series of steps undertaken to accomplish an intended end. Of course, strategies within the realm of tax planning are undertaken to achieve financial goals primarily, but they are also employed to achieve business goals. If your tax planning strategies are effective, they should successfully accomplish, or at least address, the following goals: ?

1. Lower your amount of taxable income 2. Reduce the rate at which you are taxed 3. Empower you to control when taxes get paid 4. Ensure you get all credits available to you 5. Put you in charge of the Alternate Minimum Tax

The following is a sample of strategies used to reduce one’s tax liability.

1. Maximize Retirement Contributions: Deferral of taxation is one of the most common and useful tax strategies for individuals who are currently in a high tax bracket, but if you follow this path anticipate being in a lower tax bracket at some point in the future when withdrawals (distributions) are taken.
2. Harvest Investment Losses: You can offset unlimited investment gains, and up to $3,000 of ordinary income each year by selling your investments that have lost value. If your losses exceed your gains and the $3,000 of ordinary income, you can carry them over to be used in future tax years.
3. Consider Charitable Gifts: This strategy is only useful if you can itemize your tax deductions (most often due to mortgage interest deductions), and plan on making donations. Appreciated assets are some of the most tax-efficient charitable donations. Donating these assets will allow you to avoid paying capital gains on the appreciation.
4. Invest In Municipal Bonds: Some high-income earners are now subject to the 3.8% Medicare surtax on all investment income. Municipal bonds avoid this additional tax and typically avoid all Federal and State income taxes. That means the tax equivalent yield (the yield an investor would require from a taxable bond) has increased for those taxpayers, making muni-bonds more attractive.

In conclusion, you might be able to see that the tax planning process is not something that can be done in one day at the last minute. Time must be invested throughout the year to identify opportunities for savings as well as effective solutions to accomplish your tax planning goals. We are available to help you find suitable tax strategies to reduce your taxes paid.

For assistance with tax reduction strategies, contact us at https://www.masonkranglecpa.com

303-424-2846