Effective Tax Planning: Why & How?

There are so many changes to the tax laws each year that most people simply cannot keep up.  Without an awareness of the tax laws an individual or business can make some very big tax mistakes.  But by having an awareness of the tax law changes a person can really make some huge tax reductions.  You see, it is the awareness of the law changes and how to take advantage of those changes that makes or breaks a tax return. 

How does one do effective tax planning?  First, start with a tax projection using the prior year tax return data and project your taxable income for the current year and the next year.  Adjust the figures for changes in income or deductions that you already expect to happen.  This will give you a good idea of the income tax that you will be facing for the current year and the next year.

Second, compare the tax brackets for the two years to see if there is any difference.  If there is a difference, then look for ways to shift income and deductions between the two years to take advantage of lower tax brackets.

Third, if your taxes are more than you want to pay, then look for ways to reduce taxable income.  You can do this by indentifing ways to exclude taxable income or identifing additional tax deductions.  Generally, it is a good idea at this point to discuss the matter with a tax professional that can help you identify the options that suit your situation.

Actually, we have some basic tax planning strategies that are contained in a booklet (that is easy to read).  We go over the basis strategies in the booklet with our clients to see what works best for them.  Every client's situation is unique, so the strategies are designed on an individual basis.

Fourth, look for tax credits if your taxes are still too high.  There are many tax credits available that most people overlook or are unaware of.  Again, a tax professional can go over what tax credits may work for you.

Finally, check to see if you have paid enough in withholding and estimated tax payments to avoid late payment penalties.

Now that that is done, you will know that you are paying as little as legally possible in taxes.  Sweet dreams! 

Larry Holmes, CPA