You’re undoubtedly familiar with your annual tax return preparation process. But are you thinking about taxes year round? If not, you could miss out on valuable opportunities to legally lower your tax burden now and in the future.
To start taking a holistic approach to your taxes, you need a tax plan in place, and here, we go over how you can get started.
What Is Tax Planning?
A central part of your financial plan, tax planning involves analyzing your finances from a tax perspective to maximize your tax efficiency and minimize your tax burden. In addition to lowering your tax bill, effective planning can set you up for success in retirement by helping you build up the largest nest egg possible.
How Does It Work?
The details will vary according to each taxpayer’s unique situation, but there are a few basic steps that every tax planning process should follow.
Information collection
Whether you tackle the planning process alone or with a certified tax professional, the first step is to gather all essential financial information. This should include looking at your income, expenses, tax documents, tax obligations, and risk tolerance.
Selection of tax strategies
With a thorough understanding of your financial situation, a tax advisor will develop a personalized short- and long-term tax plan covering a variety of factors, such as the timing of your income and purchases, your investments, and your retirement plans.
Review & implementation
After selecting your tax strategies, your tax advisor should review each one with you, going over any potential savings as well as the cost and step-by-step process of implementing them all. Your advisor will also be able to implement the strategies themselves so you can rest assured your plan is executed correctly.
Top Tax Strategies to Know
Here are some tried and tested tax strategies that can help keep your legal taxes obligations to a minimum.
FOR INDIVIDUALS
Consider your income timing
Accelerating or deferring income are common strategies that can decrease your annual taxes. If you expect to be in a lower tax bracket next year (common among individuals entering retirement), delaying your income may be the more strategic option. Increasing your income recognition may make more sense if it allows you to take advantage of lower tax rates or use all available deductions. To ensure you’re making the most of your income, consult a tax advisor on which option is right for you.
Stay on top of your bookkeeping
Keeping your accounting records organized and up to date isn’t a thrilling activity, but it’s essential to any effective tax plan. A strong bookkeeping practice gives you a clear picture of your tax situation, making it easier to spot inefficiencies and potential tax deductions. It also equips you with reliable data you can use to inform decision-making.
Maximize your deductions
Deductions are a simple yet often overlooked opportunity to reduce your tax bill. In some cases, individuals aren’t aware of the deductions available to them, which is where good bookkeeping comes in handy. In other cases, people fear an audit from the Internal Revenue Service (IRS). A tax advisor will work with you to determine how you can maximize your deductions, improve your financial standing, and stay compliant with legal requirements.
Evaluate your charitable giving
One of the most rewarding parts of accumulating wealth is having the means to give back to your favorite charities. As a bonus, charitable contributions can reduce your tax burden in several ways. First, qualified contributions can be deducted to lower your federal income taxes and taxable estate. If you donate long-term appreciated assets, your contributions can also minimize capital gains taxes.
FOR BUSINESSES
In addition to the tax planning strategies above, these tactics can help small businesses lower their tax liability.
Evaluate your business entity
Your business entity type has a significant impact on the taxes you pay. For example, sole proprietorships and certain limited liability companies (LLCs) must pay self-employment taxes. C corporations, on the other hand, are double-taxed entities, but they are not subject to self-employment taxes. As your business grows, discuss with a tax professional which structure would be most beneficial.
Offer employee benefits
Providing a benefits package helps you attract and retain talent for your business and can also reduce your taxable income. Tax-exempt benefits include medical and dental insurance, childcare assistance, transportation benefits, health savings accounts, and more.
At Ironwood Wealth Management, we’re here to help you identify and implement the strategies that give you the greatest tax advantage. Connect with us to learn more about our individual and small business tax planning services.
