Why Knowing About Tax Strategies Is Also Part Of Financial Literacy
Year in year out, we talk about tax efficiency. We talk about saving money through a variety of tax strategies. And, looking at all that we go through with our taxes, I believe I have to ask a question. What can you say about all the running around that you or your tax professional does to find a way that reduces your tax bill? What does it involve, and what does it mean for you and your business? I believe it involves a lot of learning about your business finances, and ultimately, about how the tax system works. All this talk about learning about finance leads us to something rather important – financial literacy. Indeed, all that you do when strategizing your taxes is part of financial literacy. You cannot employ good tax strategies if you are not financially literate.
Now, what is financial literacy? The Treasury’s Financial Literacy and Education Commission defines financial literacy as “the ability to use knowledge and skills to manage financial resources effectively for a lifetime of financial wellbeing.” Therefore, when you know the tax system, precisely how we are federally taxed and at the state level, you are taking steps in your financial literacy journey.
How do you achieve financial literacy?
You deserve to know how to attain this financial education before worrying about tax strategies. Financial literacy is achieved through financial education, and how do you learn it? It can be learned in a school, online, or your home by talking to someone privy to the subject. In other words, we are surrounded by resources we can use to learn more about this important subject. Precisely, you can do the following to learn about financial literacy;
- Use resources from the government, for example, the Treasury department’s Financial Literacy and Education Commission and visiting MyMoney.gov
- Listen to the radio, especially channels that comment on money and business.
- Listen to internet shows on financial education, for example, The Money Zone that I host every Tuesday.
The importance of tax strategies
So, we mentioned already that you need financial literacy to achieve a ‘lifetime of financial wellbeing. As such, because tax strategies are a part of this financial literacy, they help us achieve financial wellbeing and freedom. All this is achieved over a long period of employing several tools on our taxes. For example, we know that tax strategies aim to reduce your taxable income. If you are to do this by increasing your capital income as a tax strategy, you won’t achieve it in a day. But it is a process that will take a long time – spanning years of consistent work.
Remember, as you work towards this, you will be walking side by side with a tax professional. If you need a tax professional to take you through this journey, find time to call my office. Book an appointment with me, and I will gladly take you through the importance of this journey. And, while at it, we are accountants and tax professionals based in Largo, Maryland. If you live around, visiting our office is also an option. But we also work with thousands of clients across the country, in any State – all thanks to technology. Feel free to contact us even f you live in another state.
Well, as I conclude this article, I would like to explain a little more about what capital income is. I only mentioned that it helps you reduce your tax bill – which it does so well. I do like using capital income as an example because not only does it help reduce your tax bill, but each time you go for it, you are investing your money into something that grows your wealth. So, what is this capital income? This is the income you receive from an investment. Examples of capital income include earnings from the sale of property, the sale of shares, interest paid on government bonds, earnings from the sale of a boat or ship, the sale of an expensive painting, or from the sale of your share of a business.
As such, by looking at the above, when you invested your money in a business, it increased your wealth. And, if you sell shares that gained you extra money, they are favorably taxed. This means that, when someone who earns the same amount of money as wages for work provided is taxed, for example, at the 30% withholding tax rate, long-term capital gains you earn will be taxed under, or at most 20%. So, all these numbers, these calculations, and making moves are made by someone who is financially literate. If you are not, you never think of building your wealth this way. As such, let’s learn more about tax strategies and improve our financial literacy. Remember to contact our office if you need any help with your taxes, bookkeeping, and accounting.
People also asked the following
1. What tax strategies can be used for charitable contributions?
Charitable contributions can reduce income, capital gains, and estate taxes. Always check if the organizations you want to donate towards qualify. Also, it makes sense to make contributions that result in itemized deductions that are higher than the standard deduction.
2. What are some tax planning strategies?
Donate to a charity, invest in bonds or shares, convert your business to an S-Corp, but first consult a tax professional for the best advice, and maxing out retirement accounts and employee benefits is a popular strategy.
3. What are three basic strategies to use in planning for taxes?
Know your tax bracket; Reduce your taxable income; Utilize tax credits
4. What are the five general tax reduction strategies?
Reduce your taxable income (talk to a tax professional about how to do it, or call me); Harvest your losses; Max out your 401(k), 403(b), SIMPLE IRA, or any other tax-deferred retirement plan; Review your withholding taxes, especially if you are self-employed; For business owners, consider giving yourself a bonus at year-end to increase your employer-side retirement funding.
5. How do I prepare a tax plan?
Start with introducing a proper filing system. Next, review your tax bracket and learn about deductions and credits available. However, the best way to go about it is to hire a tax professional like me so your tax plan is solid and most consistent with your profile.