What is the Point of Tax Planning?

What is the Point of Tax Planning?

July 10, 2022

Tax planning is a vital part of managing your financial affairs. It's not just about getting your taxes as low as possible, but also helps you manage your cash flow and maximize returns. Green Valley Tax Services will help you manage and make good decisions. 

Tax planning can be done by anyone who has an interest in managing their finances, but it takes some time and effort to do so effectively. The better bet is to hire a professional team with the experience needed for your precise, unique situation. That way, you can leverage as many deductions and credits as possible. 

Tax Planning is About Reducing Tax Liability 

Let’s be clear from the beginning, this is not tax evasion. You are planning on paying your taxes, but are taking advantage of all the deductions, write-offs, credits, and loopholes that exist to lower that obligation. That is just intelligent money management. 

It's all about taking advantage of tax breaks, exemptions, and other tax-saving opportunities. This can mean reducing the amount of income you report to the IRS or maximizing business deductions so that you pay less in taxes on profits. 

Tax planning isn't just for big corporations with lots of money. It's also essential for small businesses, entrepreneurs, and individuals who want to reduce their tax bills as much as possible while still living within their means. 

Tax Planning vs. Tax Preparation 

Tax planning is a process that starts with deciding what your goals are and how to achieve them. It takes into account your current situation, future plans, and how they will affect each other. As such, it’s important to do some basic tax planning before engaging in more advanced tax strategies. 

Tax preparation involves taking the information that has been gathered through the planning process and then applying it to specific situations. This could include filing for deductions or credits, claiming dependents, or maximizing retirement savings contributions. 

Tax planning is about maximizing your overall financial situation. You can use tax planning to save more for retirement, reduce your monthly bills, and ensure you have enough money to pay for things like college or a new house. 

Taking Advantage of Tax Credits 

Another way to get the best of both worlds is to take advantage of tax credits. Tax credits reduce your tax liability dollar-for-dollar, unlike deductions that only reduce your taxable income, not the amount you owe in taxes.  

It’s important to understand these differences. Local, state, and federal government bodies will initiate tax credits to move the economy in one way or another. That is why you see tax credits for creating business, going eco-friendly, having children, and pursuing higher education. 

Itemizing vs. Standard Deductions 

When you file your taxes, you may want to consider whether you should itemize deductions or use the standard deduction. The difference between these two options is based on how much money you earn and what types of expenses you have during the year. 

A standard deduction is a flat rate based on your filing status and year. For example, the single filer standard tax deduction for 2022 is set at $12,950.  

Itemizing is different. This is when you deduct expenses based on specific categories like business operating expenses, home office expenses, medical bills, childcare, and others. 

Knowing when to use one strategy over another often requires a little trial and error as well as some experience with taxes in the past. Hiring an expert team of professional tax preparers is your best bet. 

Tax Planning and Retirement 

While tax planning may seem like it’s only for the super-rich, you can benefit from it too. If you are saving for retirement, there are some strategies that can help you maximize the returns on your investments. 

Charitable giving, retirement accounts, and long-term investing all play a role in tax planning. A few hundred dollars saved on your tax bill can be leveraged for thousands of available funds when it is finally time to retire. 

Know What Records to Keep and Maintain 

The key to tax planning, and in fact to sound financial planning in general, is to keep records of all your transactions. It’s important that you know what documents you need to keep and why. The IRS has up to three years to decide whether or not to audit your returns.  

It is suggested you maintain at least 7 years of records, including financial statements, receipts, brokerage statements, income, expenses, deductions, home, retirement, and other investment documents. 

Wrapping it Up 

Tax planning is a complex and time-consuming process, but it's crucial to your success. Tax planning is one of the most important things that you can do to help your business grow. It's boring, difficult, confusing, and often overwhelming. However, working with a professional advisor will help ensure that all of your bases are covered. 

The best way to ensure that you're doing everything right is by finding an account with a trusted advisor who has been doing this for years and knows how to navigate the complicated tax code without making costly mistakes or letting anything slip through the cracks. 

Tax planning is not the most exciting topic in the world. But it’s an important one — especially for small business owners and other high-earning individuals. If you want to keep more of your hard-earned money, it’s worth investing some time into learning about tax planning strategies. We hope that this article has given you a good overview of what tax planning is all about, why it matters to your bottom line (and not just in dollar amounts), and how professionals can help make sure that your taxes are done right.  

Our team at Green Valley Tax Services has the expertise needed to help you initiate robust tax strategies designed to save you money in the long run. We have spent years working with individuals and business entities, exercising tax deductions, expenses, and credits to help cash flow. That includes staying up to date with the latest code, regulations, and new incentives. So reach out to our professional team today and experience the difference a highly trained professional can make on your tax situation.