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. As explained well by Wealth
Plan: “tax planning means either deferring or avoiding taxes by taking
full advantage of the beneficial tax-law provisions, increasing tax deductions
and tax credits, and by making good use of all applicable 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
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
Note the following
sample of strategies intended to reduce one’s tax liability, as noted by Cash Cow:
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.
There are other creative ways to achieve effective tax planning,
including these two tips from My
CPA Team:
1. Gifting
Assets to Your Children: You
can gradually take money out of your estate by giving it away. If your estate
is larger than the normal exclusion amount, you can reduce its value by giving
away $14,000 per year to each of your children, grandchildren, or anyone else
without paying federal gift taxes. Your spouse can gift money as well, thus
allowing a total $28,000 gifting capability between the two of you each year
per recipient.
2. Deduct a Home-Based Office When Used for Your Employer: People
who work for companies whose
headquarters or branch offices are not located in the same city as the
employee, or outside salespeople who often use their home office as a
base, can
often use these deductions. There are rules that must be followed in
these cases, however, and it is wise to consult a professional before
diving into the
details.
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.
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