As the great American Ben Franklin once said: "In this world, nothing can be said to be certain, except death and taxes". If you own a business or are a high net-worth individual, tax planning is important. While financial planning may already be something that you are seriously either considering or implementing, a good financial plan should also include tax planning.
The Importance of Tax Planning
So, what is tax planning and why is it important? The tax laws are complex and it’s imperative you understand them. If you don't have the time or the desire to do this yourself, it may be time to seek an advisor to help you navigate them. Your money could be working for you in much more financially advantageous ways. In order to make sure that this happens, you need a plan—a tax plan.
Before you make any significant purchase or sale, all the tax implications need to be considered. Timing is everything and it can make a dramatic difference in the amount of tax you will owe. You need to consider how it will affect your bottom line.
The IRS Tax Code
The federal tax code is a monstrously large and ever-changing document that stipulates the rules and regulations regarding the government's official and legal confiscation of your money in the form of taxes. According to some sources, no one really knows how large it is, although most counts enumerate it at over 6,500 pages.
Being aware of those portions of the tax code that will enable you to legally lower your tax burden makes you truly tax-savvy. It pays to keep up with those portions that directly affect your personal finances, or if you are a business person, your company, or your firm.
Tax Planning: Your Best Legal Defense Against Paying Too Much In Taxes
Why is tax planning Important? For one thing, it is absolutely essential in order to take advantage of the many ways to minimize your tax liability. Many of the legal deductions or credits that you can take require detailed and accurate record keeping. Unfortunately, some people try to "manufacture" the records they need at tax time. This is not prudent. Instead, planning for and keeping good records is something to be done throughout the year, not just in April.
The last thing you want is an IRS tax audit. Although a very small percentage of tax returns are actually audited, if you are one of the unlucky individuals to incur one, it can be a big headache. Major causes of an audit include mathematical errors, filing the wrong forms, underreporting income, and being dishonest. Most, if not all of these items can be nipped in the bud by proper and year-long tax planning, including the keeping of scrupulous records and documentation.
Tax Planning Benefits for Stocks and Businesses
As a business owner, you need to take a good look at when there is the most benefit to you to make a major purchase. Fiscally it may make more sense to purchase this year as opposed to next year. That can only be a day or two difference in the fiscal year, such as June 28th or July 2.
Managing your capital gains is one way to keep your tax burden as low as possible. If you are an active trader and have your money in the stock market, you may have made some wise investments in the last year. There are ways that you can reallocate these gains without paying tax, that is where your tax professional comes in, they can give you the answers that you are looking for. Be sure to harvest any losses you may have had, these can offset your gains.
How Tax Planning Benefits your IRA
Your IRA is a way to keep your money tax free until you reach the age where you are required to take distribution. Saving the maximum amount allowed by law is a good strategy in your tax planning. Healthcare Savings Accounts are another way to reduce your taxable income.
If you are a homeowner and are planning to sell your home, you want to make sure that you are reinvesting that money in another home or that your gain is not more than $250,000 for a single or $500,000 for a married couple. This may seem like a lot of money but if you have lived in that home for a long time your home has likely appreciated greatly. This only applies to primary residences.
If you have a second home or an investment property, you have 180 days to reinvest your money in another property of equal or larger value to avoid capital gains tax.
These are just a few tax planning strategies that are available to you and your business. At Chandler and Knowles, we have the expertise to help you to take advantage of all the ways that are available to lower your tax liability and that is what tax planning is all about.
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Utilize Tax-Deductible Opportunities When Appropriate
Our federal government provides a number of savings vehicles that enable you to deduct against your tax burden or defer the paying of taxes until years in the future. These include Individual Retirement Plans (IRAs), 401-Ks, health savings plans (HSA's), and others. Most folks know about these vehicles but if you don't, please educate yourself about Traditional and Roth IRAs at the very least. They can be important tax-mitigating tools as well as potent retirement plans.
Should I Use a CPA or DIY Taxes?
Many people prepare and file their federal taxes by themselves but, these days, the majority do not. In order to do it yourself in a competent and effective manner, you have to be fully abreast of the ever-changing federal tax code and actually enjoy working with numbers. Not everyone is in that boat. Perhaps you’d like some real expertise to help you with tax planning and filing. It may be prudent for many to work with a financial professional like the team at Chandler & Knowles throughout the year and especially at tax time.