Why is tax planning important?
Tax planning is an ongoing phenomenon in the life of a taxpayer. It is ongoing because you learn a new tax strategy every year. You must know how to plan your taxes every year because that is how you can develop key tax ideas, including how they work. More so, it helps you to understand some important aspects of tax planning, such as recordkeeping and accounting.
After reading the above, you must be asking yourself: What can I do to plan my taxes successfully? Ensure that you do not take all your time thinking of the next move because we are only a couple of months before the start of the new tax season. It is now a matter of urgency if you want to save money on your 2021 taxes successfully. Over my career, I have discovered that taxpayers who wait for the last minute to implement tax strategies lose. They lose out on tax deductions and credits that can add up to thousands of dollars. Some of them make mistakes in their return – the kind of mistakes that get them audited. You do not want to be part of this. Your best option is to start implementing tax strategies now if you have not started already.
What are the year-end tax strategies you should be implementing?
Your tax planning must be based on a couple of tax strategies. Such strategies are around how to convert your earned income to favorably taxed types of income. You will do this so that, in the end, you pay the likes of capital gains tax and real estate tax. They have a lower tax rate than earned income tax, which is higher than those two. This is just an example. There are more ways to work around your earned income such that you end up paying few to no taxes. Many people were surprised that Donald Trump only paid $750 in taxes within a couple of years, given that he is a billionaire. As a tax professional, I understand that it can happen to anyone who works with a proper tax professional. It’s totally legal. You only need excellent tax planning.
Seeing that the year is about to end and that the new tax season will open towards the end of January, below are some of the tax strategies you should implement before the year ends. These are based on the assumption that you will choose to itemize your deductions.
- Gather, verify, and safely keep all tax records
- Max out your 401K, which is an employer-sponsored retirement plan
- Contribute to your individual retirement account (IRA)
- Finalize travel logs and meals
- Add to your charitable contributions
- If you wanted to buy an expensive vehicle that you would deduct, do it now
- Choose a tax professional you want to prepare your taxes now
Keeping tax records goes beyond just gathering everything around. But you must also know what records to keep. For example, if you are to deduct travel expenses, are your mileages recorded and safely stored? Are your meal logs in order, together with accompanying receipts? If you have a new child and want to claim the child tax credit, ensure that every document that proves that you are the parent and you live with the child is in place. The same goes for medical records and many others.
Retirement contributions are also good tax strategies you can use. If you are employed, you must ensure that you max your 401K before the end of the year. Remember, you cannot contribute after December 31. Any contributions you make after that date will go toward next year’s taxes, definitely not 2021. If you see that your current contributions will not result in you maxing your 401K, speak to your employer and adjust your contributions (withheld from your salary) to meet that limit. The limits for 2021 are as follows: $19,500 per year for workers under the age of 50 and $26,000 for those 50 and up
Besides tax deductions, you must also think of tax credits. These are lucrative as they result in a dollar-for-dollar reduction in your tax bill. For example, if your total tax bill is $2,000 and you qualify for tax credits of $1,500. Your resultant tax bill will be $500 ($2,000 – $1,500). Find out the tax credits you qualify for and prepare to claim them now. For this, I recommend you speak to a tax professional. If you need any, talk to me today. Call my office and book an appointment. I can assure you that the money you pay for my services is a part of the money you save from taxes if I help you. In other words, you are better off working with me than filing your own tax return.
People have also asked the following questions
- What are the 3 basic tax planning strategies?
The basic tax planning strategies revolve around reducing your overall income, increasing your number of tax deductions through the year, and taking advantage of certain tax credits, for example, the Child Tax Credit.
- What are taxation strategies?
A tax strategy is a plan that you devise to reduce your overall tax bill. Tax strategies are implemented based on each taxpayer’s economic status or taxpayer status. Some are married, some are single filers, some have children, and some are business taxpayers. Each one of them can use tax strategies differently to capitalize on their taxpayer status.
- How can I reduce my income tax?
To reduce your income tax, you must implement tax strategies that lower your earned income and increase your capital gains income. You can also contribute to charity according to IRS guidelines.
- What are some tax planning strategies?
Popular tax planning strategies include contributions to a retirement account, contributing to charity, and investing in real estate or dividend-earning stocks.
- What is effective tax planning?
Effective tax planning happens when the activities of reducing a taxpayer’s tax burden result in the desired reduction of the same tax burden. For example, we say a taxpayer has implemented effective tax planning if they were willing to reduce their tax burden by 60% and have actually achieved that through their tax strategies.
