Tax Planning: Tips, Steps, Resources for Planning
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No one ever dreams about tax planning but it is an important part of tax preparation. Good tax planning can help you avoid mistakes that are costly to your business and yourself financially. If you’re trying to be a successful real estate agent, for instance, taking out business loans without considering the tax implications can hurt your bottom line before you can take off. This might all seem too complex but it’s relatively simple once you understand the basics. In this blog post, we’ll give you a few tips and resources to help get started with planning your taxes.
Benefits of Tax Planning
Simply put, tax planning allows you to reduce your taxes and maximize the deductions that apply to your business.
Let’s go over three specific benefits you get when you tax plan:
Preventing surprise taxes
When you plan your taxes, you can avoid having to pay large amounts of money in April. You’ll know exactly what is due and when so there won’t be any surprises at the end of the year.
Reducing taxable income
Tax planning isn’t just about lowering how much in taxes is due, it also allows you to reduce your taxable income. This allows you to convert what would have been taxable income into additional sources of income, such as investing in stocks or personal projects.
Maximizing deductions and credits
Tax planning can help maximize all types of deductions and credits so you get more of a return from your investments.
Getting Started with Tax Planning
Now that you know just some of the benefits of tax planning, let’s go over how to get started.
You can start tax planning on your own or with the help of a tax professional. If you are doing it on your own, here’s what to do:
Identify your tax bracket
The US tax system is progressive, which means you pay higher rates as your income goes up. This means you can reduce how much in taxes you owe by lowering the amount of taxable income, which is what makes tax planning so important! You might even be able to convert some or all of your ordinary income into capital gains.
Understand the difference between tax deductions and credits – Once you know where you fall on the tax bracket, you need to know what deductions and credits apply to your situation.
Tax deductions reduce your taxable income. Tax credits directly lower the amount of taxes you owe so they are even more beneficial than tax deductions because they’re easier to calculate. A $500 tax credit will always lower your taxes by $500.
Choose between itemizing or accepting the standard deduction
The standard deduction rate is set by Congress every year to keep up with inflation. The standard deduction rate that applies to you depends on your filing status. Taking the standard deduction makes sense if you believe your deductions won’t exceed the standard deduction for your filing status.
But you might consider itemizing your deductions if they add up to more than the standard deduction or if you have a lot of miscellaneous expenses that qualify as tax write-offs. To figure out whether it pays to take the standard deduction or itemize, start by going through last year’s tax return and adding up all your deductible expenses. That will give you a sense of whether itemizing this year could save you money.
Identify tax credits and deductions that work for you – There are hundreds of possible credits and deductions, but some are better than others. Tax planning can help you identify the credits and deductions that work best for your situation, then choose what’s easiest to maximize based on how much time you want to spend.
Some examples you can look into are charitable contributions, child and dependent care credit, home office expenses, property taxes, and residential energy tax credits.
Keep your tax records
When you know what tax credits and deductions apply to your situation, the next step is getting organized. Keep copies of all receipts for expenses like charitable contributions or property taxes throughout the year so they won’t get lost in storage come tax time. This will save you valuable time that could be better spent on other things.
A good rule of thumb is to keep all tax records for at least three years, which is how long the IRS usually has to decide on an audit—at least for those who have not had any tax issues.
Make use of free resources online
As you can see, tax planning is complicated and it’s easy to make mistakes. But there are plenty of resources out there that will help walk you through the process step by step so you don’t have to figure it all out on your own. You’ll find a lot of free information online from government organizations or independent websites with calculators for figuring out what deductions or credits apply to your situation. Tax software like TurboTax and H&R Block might be useful if you want to do your taxes yourself.
In the end, tax planning boils down to finding more deductions and lowering your taxable income as much as possible within legal limits. With the steps, tips, and resources we provided above, you can ensure that you’re taking full advantage of your tax situation for this year and beyond.
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