3 Reasons You Should Start Tax-Planning Now
Financial planning is a key to managing personal finance. It is the analysis of your financial situation or standing, which also involves your taxes or how you are taxed. Analyzing and planning your taxes ensures efficiency in your tax payments. Tax efficiency results in the reduction of your tax liability (the amount you owe the IRS). Some taxpayers use saved money to increase their ability to make contributions towards retirement plans and other investments. Consistently doing this accelerates their ability to build generational wealth. Nevertheless, tax planning basically utilizes things such as deductions, allowances, and exemptions to reduce tax liability.
When engaging in tax planning, your major aim is to reduce your overall taxable income by increasing tax deductions throughout the year. It also involves taking advantage of certain tax credits.
So, why should you start planning your taxes now? Above is a mention of ‘increasing tax deductions throughout the year.’ So, you cannot take advantage of these deductions and credits throughout the year if you do not plan your taxes daily. This means that if you have not started planning your taxes for this year, you are already 6 months late. Read below to see some more reasons to start planning your taxes now.
Reasons to start tax planning immediately.
Inflation might eat into your income, so you might as well claw back some of it through taxes.
We are only used to hearing about saving money on taxes (through deductions and tax credits). But we seldom talk about other benefits of tax planning. For example, our inflation is currently over 8%, something we last experienced more than 40 years ago. This shows that something is not right – since we beat inflation from bad years such as the 2007-2008 financial crisis.
Inflation is bad because it simply steals from you. It does so by ensuring that the money you used to buy, for example, 5 gallons of gas, can only buy you 4 today, and it could buy you only 3 in the next month or so. As this happens, your employer will never increase your salary every month. This means you are left to deal with your budget on your own.
So, it makes sense to start using tax planning and ramp up your tax deductions and make sure to get ready to claim every tax credit you are eligible for. This also means you must stop this habit that many people do – being lazy to plan taxes because you think the standard deduction is enough. Well, as long as it does not result in you getting a refund in the region of thousands of dollars, or it still leaves you owing taxes, then it is not suitable for you. You must start itemizing deductions. Start planning for that now. If you need help, go to my Link Tree and book an appointment with me, it’s my job to help you plan your taxes.
Tax planning can motivate you to start budgeting and employ other financial literacy principles such as saving and retirement planning.
I like how I started with these two points showing you the advantages of tax planning that are not about directly saving money or getting a refund. This is one of them. Tax planning increases your financial literacy, plain and simple! Consider someone who consulted with me; after I encourage them to plan their taxes and save money, they may ask me what to do with that money they saved. I could respond with anything, depending on their situation. For some people, I can simply encourage them to open a savings account, put their money in it and earn interest.
I might advise some to start contributing and maxing their tax-free retirement contributions during the year, which helps them further save more money on taxes. Once they start doing this, they may repeat the cycle on their own and start looking forward to their next contribution. They also learn why they are doing this – which is mainly to bulk up their retirement money or to build generational wealth, especially if they are buying stocks in between. All these tricks or tips turned into real action tell a story about someone learning and implementing principles of financial literacy. Can you compare this with someone who is always late with their federal income tax, or drinks all their money and retires with nothing even if they spend 30 years working? Not at all! So, you need tax planning after all. There is no better time to start than now.
You won’t save on taxes without planning.
Business owners who do not plan their business and personal taxes lose thousands of dollars on taxes. This is because they do their own taxes without consulting a tax planner like me. It is common knowledge that the Tax Code is thousands and thousands of pages long. It is intimidating – but the secret is not everything therein is to make you pay more taxes. Some of the tax rules are designed to help you save money, protect your investments, and plan for your retirement. And yes, there are even hundreds of case laws that tax professionals like me use to protect the taxpayer during IRS litigation, audits, etc.
Therefore, all of you who haven’t started saving money and planning for retirement – even though you file a tax return every year – have been ignoring tax planning. Had you been implementing it, you could have noticed cash or savings piling up somewhere. But right now, you own none of those. But there is still a chance for you to make things right. If you hire me to start planning your 2022 taxes, you will still salvage some money from this year’s taxes and continue the trend in 2023 and beyond. That’s how you start saving money to build generational wealth. If you want to hire me for tax planning, go to my Link Tree and click, “Want Me to File Your Taxes?” to get started.
Frequently Asked Questions
- What do you mean by tax planning, and what is its objective?
Tax planning involves analyzing your finances so that you reduce your tax liability to a figure as low as possible. Therefore, reducing the amount of taxes you pay to as low as possible is the main objective of tax planning. Other objectives emanate from what you do with the money you save, for example, investing in the stock market using the saved money.
- What are the three types of tax planning?
Three types of tax planning are Purposive, Permissive, and Long-Range and Short-Range tax planning.
- How do you conduct a tax plan?
A tax plan is hinged on your chosen tax strategy, which I recommend should be designed with the help of a tax professional. As such, conducting a tax plan differs for every individual. In order to conduct yours, engage a tax professional and let the both of you figure out all your income sources and expenses. Moreover, you should consider everything about yourself, whether you are married or not, whether you have kids, are you disabled, go to college, etc. Many things get into this (your tax plan), which is why it is best to enlist the services of a tax professional before doing this. It helps to maximize tax savings.
