When it comes to taxes, there are a lot of things that go into the process. From understanding the different types of taxes to figuring out how to file them correctly, it can be a bit overwhelming. However, tax planning is an important part of the process and one that everyone should be aware of. The end of the financial year is upon us and there are examples of useful tactics which will help you to plan ahead for the next one. Here are five types of tax planning everyone should be aware of.
1) Tax Diversification:
One way to minimize your taxes is to diversify your income sources. By earning income from a mix of taxable and tax-deferred sources, you can lower your overall tax bill by falling into a lower tax bracket. For example, if you earn $50,000 from a traditional job and $10,000 from a Roth IRA, you will only be taxed on the first $40,000 of your income (the rest is tax-free). This can save you hundreds or even thousands of dollars in taxes each year.
2) Tax Gain or Tax Loss Harvesting:
Another way to reduce your taxes is to take advantage of capital gains and losses. If you sell an asset (such as a stock or mutual fund) for a profit, you will owe taxes on the gain. However, if you sell an asset for a loss, you can use that loss to offset any gains you may have had during the year (up to $3,000). This strategy is called “tax gain or tax loss harvesting” and can be used to minimize your taxes owed each year.
3) Social Security Income Can Be Taxable – Up To 85%:
Did you know that your Social Security benefits may be taxable? If your “provisional income” (which includes half of your Social Security benefits plus all other forms of income) exceeds $34,000 (or $44,000 for married couples filing jointly), up to 85% of your benefits may be subject to taxation. This little-known fact can come as a nasty surprise at tax time, so it’s important to plan ahead and factor this into your overall tax planning strategy.
4) Charitable Giving as a Tax Savings Opportunity:
Another way to save on taxes is to make charitable donations. Cash contributions made to qualified charities are deductible on your federal income taxes (and in some cases, state and local taxes as well). Just make sure to keep good records of all donations made so you can claim them come tax time. The more you give, the more you save!
5) Multi-Year Tax Planning:
Finally, one of the best ways to minimize your taxes is to plan ahead. By taking a long-term view of your financial situation and making strategic decisions now about how much income to earn and how best to invest it, you can save yourself a lot of money down the road. So start thinking about next year’s taxes today!
Alongside these tactics, you should also keep some tax planning principles in mind,
- Saving for retirement: One of the best ways to save on taxes is to contribute to a retirement account. By doing this, you’ll be able to reduce your taxable income and also get a deduction on your contribution.
- Invest in yourself: Another great way to save on taxes is to invest in yourself. This can be done by taking courses or attending seminars that will help you learn more about your industry and improve your skills. Not only will this help you professionally, but it can also lead to tax deductions.
- Stay organized: Organizing your financial records can go a long way when it comes to tax time. By keeping track of your income and expenses, you’ll be able to maximize your deductions and make the process a lot easier come tax season.
- Know the deadlines: One of the worst things you can do come tax time is miss a deadline. Not only will this result in penalties and interest, but it can also cause a lot of stress. Be sure to mark all important dates in your calendar so you don’t miss anything.
- Get help: If you’re feeling overwhelmed by the tax planning process, don’t hesitate to get help from a professional. An accountant or tax specialist can offer valuable advice and assistance, making the process a lot less daunting.
There are many things that business owners can do proactively throughout the year in order to reduce their taxes payable. These five strategies are just some examples of what type of activity constitutes sound tax planning. While no one likes paying taxes, by following these tips you can ensure that you’re only paying what is absolutely necessary. And that’s good for both your bottom line – and your peace of mind!