If you were to look up “Tax Planning”, the definition would be:
Tax planning is the analysis of a financial situation or plan from a tax perspective. The purpose of tax planning is to ensure tax efficiency. Through tax planning, all elements of the financial plan work together in the most tax-efficient manner possible. Tax planning is an essential part of a financial plan.
If you were to look up “Why do I need to tax plan?” you would see:
Tax planning is important for both small and large businesses because it can help them to achieve their business goals. When you have a tax plan as the owner of a business, you can lower the amount of taxable income, gain more control of when taxes are paid and also reduce the rate of tax.
So, who wouldn’t want to lower their taxes and gain more control?!
There are benefits of tax planning for both large and small businesses and planning plays an important role in:
- Lowering the amount of taxable income
- Reducing personal tax rate
- Allowing greater control of when taxes get paid
- Maximizing tax relief/tax credits available
- Identify long-term strategies which will leave more value in business for you
- Understand the best tax structure for you
OK so what’s the point?
The primary purpose of effective tax planning is to maximize the taxpayer’s after-tax wealth. The secondary objective of effective tax planning is to reduce or defer the tax in the current tax year.
An effective tax plan should encompass every area of your financial life. It will bridge your investments, income, business structures, retirement plan, charitable giving, estate plan, and more.
Effective tax planning is easy to start:
- First, keep a good filing system for your tax information
- Gain an understanding of your current situation
- Gain an understanding of what you may be able to deduct
- Think long-term
- Start early – more will be available
- Don’t fear the IRS – just follow the rules
Tax planning should not be overlooked. It will save you money! Remember, your tax professional does play an important role. However, you should still control the process. Make sure you understand as much as possible and are thinking long-term.