Tax Planning – How to Maximize Tax Breaks and Minimize Taxes
Tax Planning is the process of arranging a person’s finances to maximize tax breaks and minimize taxes owed in a legal and responsible manner. Whether you work with an accountant or do your own planning, incorporating tax-saving strategies into your financial life can make the difference between paying less in taxes and getting more back when you file your return.
Tax planning strategies can reduce your taxable income, lower the amount of taxes you owe, or even allow you to claim certain credits or deductions. In addition, tax planning can reduce the stress and anxiety associated with filing your taxes. While tax laws are complex and constantly changing, there are many ways to reduce the impact of taxes on your life.
Generally, tax planning involves manipulating the timing of income and expenses in order to pay the least amount of taxes. This can be done by adjusting the allowances on your W4, making changes to investment accounts, and selecting retirement plans and other payments accordingly. While some strategies are illegal, such as tax evasion or fraud, most forms of tax planning are entirely legal.
A good place to start when developing a tax strategy is determining what your adjusted gross income (AGI) is. This is the amount of your taxable income after adding certain items to your total, such as contributions to your 401(k) and IRA accounts, paying interest on student loan debt, medical expenses, or charitable donations. It is also the number that you use to determine your federal tax bracket, which will be used to calculate your state and local taxes as well.
In some cases, you may want to accelerate the receipt of income in order to increase your tax deductions or qualify for a certain credit. For example, you may wish to receive a bonus from your employer in this year instead of next in order to avoid having to pay more taxes at the end of the fiscal year. You might also wish to postpone the receipt of income in order to avoid being placed into a higher tax bracket, such as by holding off on collecting investment returns this year in anticipation of being moved into a lower tax bracket in future years.
For retirees, the timing of required minimum distributions (RMDs) remains a critical consideration when it comes to tax planning. It is possible to delay the receipt of these withdrawals in order to keep more money in pre-tax account balances, but it is important to consult with a tax professional for advice and guidance.
In addition, it is wise to review your current tax status on an ongoing basis. This way, you can stay abreast of emerging tax considerations and be prepared when it comes time to file your return. You can get help from a tax professional, but the IRS also offers online resources for your convenience. The more you put into your tax planning efforts, the better off you will be at the end of the year.