Tax planning is the process of planning ahead and creating strategies which minimize the payment of taxes by utilizing all of the legal methods that are available through the tax statutes that are on the books. This would include federal, state, and local taxes.
Tax planning could be said to be a part of financial planning, which has similar goals of minimizing unnecessary expenses and utilizing various tools and techniques in managing money more efficiently over a period of time.
In order to get the most out of tax planning it is best to work with an individual or a firm who specializes in the field of tax planning and has a track record of success in helping others to achieve objectives in the reduction and the proper use of taxes.
Usually a Certified Financial Planner, a CPA or an Attorney are capable individuals to be of great assistance in this area. Much of the tax planning achievements are accomplished in the business arena, as tax savings in personal areas are somewhat limited.
The only real savings from a personal tax standpoint that stands out is the deduction that is currently available from the interest that homeowners pay on their mortgage. When a mortgage is taken out by an individual, most of the payment that is made each month in the early part of the mortgage is interest, and that amount is deductible each year on the individual’s schedule A of the person’s federal income tax. That is not to be taken lightly because that can be the largest deduction that most people are able to achieve on a personal basis.
From a business aspect, if a person is in a very high tax bracket, it is sometimes possible to form a C corporation for the business and then you will have the ability to structure more programs that will allow “sectioning of funds,” which simply means that it will be possible to decide what funds to send for personal needs and what funds to use for business needs. Jesse Stockwell tax advice includes this type of recommendation.
With a corporate setup, it might be advantageous to purchase assets that are used for business purposes anyway, through the corporation. The corporation will start out a the lowest tax bracket, so you would be using more “efficient funds” to purchase assets, which could then be used in the business in the same manner as if they were used personally for business needs.
Tax planning can also encompass the use of trusts for estate planning purposes to segregate assets for distribution at a person’s death more efficiently in order to minimize death taxes.
The timing of deductible purchases can also be a factor in saving tax dollars and getting maximum use of those expenses. Sometimes it is a decision of determining when you want to make a purchase of supplies or some other item, either in the current fiscal year or the next. You can decide which tax year will give the best advantage.
Tax planning is largely a matter of looking at the facts of what you are doing from a business and planning standpoint and then planning for maximum benefit as to the tax consequences of your actions.