An Introduction To Tax Planning

There’s no getting around it; taxes are a necessary evil. But that doesn’t mean you can’t take steps to reduce the amount of taxes you pay each year. That’s where…

Tax

August 25, 2022

Written by John Wonneberger

There’s no getting around it; taxes are a necessary evil. But that doesn’t mean you can’t take steps to reduce the amount of taxes you pay each year. That’s where tax planning comes in. Tax planning is organizing your finances to minimize your tax liability. 

 

There are many different strategies you can use for tax planning, and each has its benefits. Not all businesses need to engage in tax planning, but those that do stand to benefit greatly from it. In this blog post, we will discuss what tax planning is, its benefits, the different types of strategies you can use for it, and more. 

 

What Is Tax Planning?

Tax planning is organizing your finances to minimize your tax liability. You can do this in several ways, but the goal is always the same: to pay as little in taxes as possible. 

 

Many factors go into tax planning, including your income, deductions, credits, and more. The key is understanding how these all work together to maximize your savings. 

 

How Does Tax Planning Work?

The first step in tax planning is to determine your income. This includes all forms of income, such as wages, investments, and more. Once your income is figured out, you can start looking at deductions and credits. 

 

Deductions are expenses that can be subtracted from your income, reducing the taxes you owe. Credits are reductions to the amount of taxes you owe based on certain criteria. Both deductions and credits can save you a significant amount of money on your taxes if used correctly. 

 

The Benefits Of Tax Planning

Tax planning has many benefits, including reducing your overall tax liability, maximizing your deductions, and improving your cash flow. Tax planning can also help you take advantage of tax credits and other opportunities.

 

Businesses of all sizes can benefit from tax planning. However, it is especially important for small businesses, as they often have a smaller margin for error regarding their taxes. There are several different types of tax planning strategies that businesses can use. The most common include:

 

Minimizing taxable income includes strategies like deferring income or taking advantage of deductions and credits.

 

Maximizing deductions: This includes maximizing your business expenses or taking advantage of special deductions for small businesses.

 

Improving cash flow: This can be done by timing your deductions and payments so that you have more money available when you need it.

 

Your business’s best tax planning strategy will depend on your specific situation. However, there are some general tips that all businesses can follow to reduce their tax liability and improve their bottom line.

The Different Types Of Tax Planning Strategies

Big and Small businesses need to have a different approach when planning their taxes. Given the company’s size, the amount of money they bring in, and other important factors, each company will have a different way of planning for taxes. Let’s take a closer look at some of the most popular types of tax planning:

 

Asset Protection: Asset protection is a type of tax planning that helps to protect your assets from creditors and lawsuits. You can do this through various means, such as setting up trusts or using offshore accounts.

 

Business Planning: Business planning is another important type of tax planning. This helps you to structure your business in a way that minimizes your tax liability. For example, you may choose to set up a corporation or LLC, which can help you save on taxes.

 

Estate Planning: Estate planning is another vital element of tax planning. This involves ensuring that your assets are distributed according to your wishes after death. This can help to minimize the amount of taxes paid on your estate.

 

Retirement Planning: Retirement planning is another key element of tax planning. This involves making sure that you have enough money saved up to cover your expenses in retirement. This can be done through various means, such as setting up a 401k or IRA.

 

Deferring income: You can defer income by postponing it when you receive it. For example, if you know you’ll be in a higher tax bracket next year, you may want to defer some income to lower your taxes this year.

 

Accelerating deductions: You can accelerate deductions by taking them sooner than you would normally be able to. For example, if you make charitable donations, you may want to consider bunching your donations into one year so you can take a larger deduction.

 

Harvesting losses: You can harvest losses by selling investments that have lost value and using the losses to offset gains from other investments. This can help you minimize your overall tax liability.

 

Grow and reserve: The simplest and most common type of tax planning. Grow and reserve helps you save money to reinvest it into your business. The goal is to minimize your taxable income and defer taxes until you’re in a lower tax bracket.

 

All of these types of tax planning strategies can be beneficial for businesses and individuals alike. Professional tax services can help you determine the best strategy for your needs. 

 

How To Plan For Your Taxes Each Year

The first thing you need to do is to understand your tax bracket. This is the percentage of your income that you will be taxed. The higher your bracket, the more taxes you will pay. There are different tax brackets for different types of income, so it’s important to understand each one before you start planning. 

 

There are three main types of tax planning:

 

Short-Term 

This involves looking at ways to reduce your taxable income in the current year. For example, if you know you’ll be in a higher tax bracket next year, you may want to defer some income to lower your taxes this year.

 

Medium-Term 

This involves looking at ways to reduce taxes over several years. For example, if you’re considering selling a piece of property, you may want to wait until after you’ve owned it for a certain number of years to minimize the taxes you’ll pay on the sale.

 

Long-term 

This involves looking at ways to reduce your taxes over the long term. For example, if you’re considering doing some estate planning, you may want to consider ways to minimize the taxes your heirs will have to pay on your estate.

 

What To Do If The IRS audits you

If the IRS audits you, don’t panic. The audit process is quite straightforward, and as long as you keep calm and cooperate, it should go smoothly. Here’s what you need to do if you find yourself being audited:

 

Gather All Your Documents

First, gather all of the documentation that the IRS has requested. This includes everything from your tax returns to receipts for deductions. Organizing everything neat and orderly will make the audit process much easier (and less time-consuming).

 

Meet With An IRS Representative

Next, meet with the IRS agent who will be conducting the audit. They will review your documentation and ask questions about anything unclear. Be honest in your answers and try to provide as much detail as possible.

 

Receive A Refund Or Appeal

Lastly, once the audit is complete, the IRS will issue a refund or send you a bill for any taxes owed. If you disagree with the audit’s outcome, you have the right to appeal. However, it’s important to remember that appeals can be time-consuming and costly, so they should only be used as a last resort.

 

How To File An Amended Return

You might need to file an amended return for a few reasons. Maybe you made a mistake on your original return or forgot to include some important information. Regardless of the reason, if you need to make changes to your return, you can do so by filing an amended return.

 

The process for filing an amended return is fairly simple. 

 

  1. You will need to fill out Form 1040-X: This is the form used for making changes to your original tax return.

  2. Mail it to the IRS: The address where you should send the form will be listed on the form itself.

  3. The IRS will process your amended return and let you know if you owe any additional taxes or if you are due a refund.

 

It’s important to note that you cannot e-file an amended return. You must mail the form to the IRS. If you have any questions about whether or not you need to file an amended return, you can contact the IRS directly. They will be able to help you determine if you need to take this step.

 

Consequences Of Not Doing Proper Tax Planning

As is evident, tax planning is not something to be taken lightly. The consequences of not doing proper tax planning can be costly in terms of money and time.

Not having a solid tax planning strategy in place can result in:

 

  • Missing out on deductions and tax credits
  • Paying more taxes than necessary
  • Overpaying estimated taxes
  • Facing penalties and interest charges from the IRS

 

All of these consequences can be avoided by simply taking the time to develop a solid tax planning strategy. 

 

Start Planning Today

To avoid any issues down the road, starting your tax planning as soon as possible is important.  Nesso Tax can help you develop a personalized tax planning strategy to save time and money. 

 

Our Nesso Group team can help you with all your tax needs, whether filing your taxes, developing a tax plan, or anything in between. We’re here to help you save time and money so you can focus on what’s important – running your business. Contact us to learn more about how we can help.

 

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