Save On Taxes: Master Tax Planning Strategies

True or false: You should stop thinking about your taxes once you file.

False!

Even though tax season as we generally think of it ends in April, your taxes — and tax planning strategies — are relevant all year round. Having a tax planning strategy in place can help you or your business reduce your tax liability for less money owed in taxes. And who doesn’t want a lower tax bill?

Understand Your Options: Tax Preparation vs. Tax Planning vs. Tax Strategy

Where do tax planning strategies start? It depends on your goals. If you’re content with your tax liability, you may consider simply preparing your taxes during tax season. If you’d like a lower tax liability, though, tax planning and tax strategies may be better matches for your goals.

Before you undertake any tax planning strategies, let’s explore the similarities and differences between tax preparation, tax planning, and tax strategies, so you can make an informed decision on which will fit your needs.

Tax Preparation: The Annual Ritual

Tax preparation is the process of completing your tax return. Typically, this includes gathering financial information, like W-2s, and documenting the year’s financial activities. It can be done individually or with the support of a tax preparer or accountant.

Tax preparation generally happens once per year, in advance of the April tax deadline, for the previous year. While this is a necessary step in the tax process, it limits your opportunities to adjust your tax liability, as the year in question has already been completed.

Tax Planning: The Proactive Approach

Tax planning is a strategy involving proactive steps to legally reduce your tax liability for the year in the hopes of paying the least allowable amount in tax. Tax planning is also utilized to make sure you’ve paid in enough tax during the year and to give you an idea of what additional tax might be due come filing time. This short-term approach to taxes requires actions to be taken and decisions to be made throughout the year to reduce your tax liability when tax season rolls around.

Tax Strategy: The Long Game

Tax strategy is a long-term tax planning method that allows you to align your financial goals with your tax planning strategies to reduce tax liability and generate wealth over time. This approach is tailored to your unique circumstances, either as an individual or a business owner.

Tax strategies may involve structuring transactions, managing investments, and utilizing tax-advantaged accounts, among other things, to achieve tax objectives. This approach to tax liability is typically done in close collaboration with an accountant or tax professional.

Key Tax Planning Strategies to Consider

There are three major ways to reduce your tax liability for the upcoming tax season: reduce income, maximize deductions, and take advantage of tax credits. Using one or a combination of these tax planning techniques can help you with tax planning for the upcoming year. No matter what you choose, though, be sure to check in with your tax professional to ensure that your actions will have the intended effect.

Reduce Income

For individuals, your tax liability is based on your adjusted gross income (AGI), which is the amount of income that is taxable. You can reduce that income by making a variety of investments, such as investing in municipal bonds and maxing out retirement accounts and other employee benefits you may be offered.

For businesses, reductions in income do not have to come at the expense of your business health — other options are available. For example, hiring family members can help reduce taxable income. Another way to reduce taxable income for your business is to keep track of business losses, which can be deducted from your income.

Maximize Deductions

Your deductions are subtracted from your AGI, making them another valuable tool for tax planning. You may maximize your deductions with expenses like charitable contributions, home mortgage interest, and student loan interest, or through savings like Health Savings Account contributions. For a comprehensive list of available deductions for individuals, visit the IRS website.

For businesses, deductions must follow specific rules, such as being ordinary and necessary. For more information, visit our blog on business tax deductions.

Take Advantage of Tax Credits

According to the IRS, a tax credit is “a dollar-for-dollar amount taxpayers claim on their tax return to reduce the income tax they owe.” There are many tax credits available to both individuals and businesses.

For example, the Earned Income Tax Credit is a tax credit for a variety of workers, including individuals who are veterans, self-employed, not proficient in English, and living in rural areas, among other qualifications.

Another potential tax credit for individuals is the Child Tax Credit, which is a tax credit workers can receive for their children under 17 with Social Security Numbers that are claimed as dependents on their tax returns.

For businesses, many tax credits have to do with how a business is run, such as the Work Opportunity Credit for eligible employees. Business tax credits are a powerful incentive, so their use is more limited than business tax deductions.

Work with a Professional on Your Tax Planning Strategies

Tax planning and tax planning strategies can get complicated, especially when you consider the myriad of legal implications associated with your taxes. While these tax planning strategies are a starting point for reducing your tax liability for the year, a financial professional, like a tax professional or accountant, can help you align your unique circumstances with your tax planning strategies while ensuring that your strategies are legal, ethical, and moral. To get started with your tax planning strategies, request a free first consultation with our tax planning professionals.