What are the three basic tax planning strategies?

What Are Basic Tax Planning Strategies? Some of the most basic tax planning strategies include reducing your overall income, such as by contributing to retirement plans, making tax deductions, and taking advantage of tax credits .

What is a qualified tax planning strategy?

Proper tax planning utilizes the current tax law to maximize your tax deductions and credits and minimize your tax liability . Used effectively, it can be an important part of your financial management strategy and help you meet your short- and long-term financial goals.

What are the three 3 main sources of tax revenue?

California's state and local governments rely on three main taxes. The personal income tax is the state's main revenue source, the property tax is the major local tax, and the state and local governments both receive revenue from the sales and use tax .

Which of the following terms is not one of the three basic tax planning strategies?

Tax minimization is not one of the three basic tax planning strategies. The basic tax planning strategies include timing, income shifting, and conversion.

What are two tax planning strategies to minimize your future income taxes?

This includes saving money for retirement, taking part in employer-sponsored retirement plans, and using tax-loss harvesting as a strategy. You can also use the deduction for charitable donations to lower your tax bill if you itemize your deductions.

What are the two basic strategies that corporations use to minimize their tax burden quizlet?

The two strategies are deferring taxable income and accelerating tax deductions . The intent of deferring taxable income recognition is to minimize the present value of taxes paid. The intent of accelerating tax deductions is to maximize the present value of tax savings from the deductions.

What strategies to reduce taxes does tax avoidance mean?

Tax avoidance is any legal method used by a taxpayer to minimize the amount of income tax owed. Individual taxpayers and corporations can use forms of tax avoidance to lower their tax bills. Tax credits, deductions, income exclusion, and loopholes are forms of tax avoidance.

What are the three tax shelters?

Examples of tax shelters include tax credits, tax deductions, and tax-advantaged investment accounts .

What is tax planning most commonly done to?

Usually, tax planning consists in maintaining the taxpayer in a certain tax bracket in order to reduce the amount of taxes to be paid , which can be done by manipulating the timing of income, purchases, selecting retirement plans, and investing accordingly.

What are the four variables of tax planning?

The entity variable: Which entity undertakes the transaction? The time period variable: During which tax year or years does the transaction occur? The jurisdiction variable: In which tax jurisdiction does the transaction occur? The character variable: What is the tax character of the income from the transaction.

What is the tax planning strategy of income shifting?

Income shifting, also known as income splitting, is a tax planning technique that transfers income from high to low tax bracket taxpayers . It is also used to reduce the overall tax burden by moving income from a high to low tax rate jurisdiction.

Basic Tax Planning Strategies (2024)

Most people despise tax season and for good reasons. It is overwhelming, stressful, and at times downright confusing. This is especially true now, with the 2018 amendments to the U.S. tax laws, rates, brackets, and more. Hiring an accountant helps, but there are still things that you need to do independently to get the best service and the biggest returns. One of these things is tax planning. This will allow you to take advantage of the new changes while cutting down your overall tax bill and maximizing your returns. But what is tax planning exactly? In this article, we’ll explore the basics of tax planning and a number of tax planning strategies for you to use now and in the future.

What is Tax Planning?

Everybody deals with finances—it’s often just done in different ways. One way to work with your finances is through tax planning. Tax planning is a process that helps you reduce the amount of taxes you’ll owe at the end of each year. There are a number of ways you can go about tax planning, but it primarily involves three basic methods: reducing your overall income, increasing your number of tax deductions throughout the year, and taking advantage of certain tax credits.

Why is Tax Planning Important?

The reason why tax planning is important is simple: it saves money and helps you avoid overpaying your taxes. Aside from that, however, tax planning will help you better understand what you’re spending money on and how you can get rewarded for planning for retirement or advancing your education.

Basic Tax Planning Strategies

If you’re ready to start reaping the benefits, it’s important to understand a few basic tax planning strategies first. These will get you started, and as you continue, you’ll start to learn different variations of these strategies that will help you save more.

Know Your Bracket

The first step in your tax planning strategy is to understand which tax bracket you fall in. With the 2018 amendments, your bracket may have changed. You can find information on the 2019 tax brackets here and if you have any questions, don’t hesitate to contact our accounting firm for help.

Reducing Your Income

This is a great place to start with your tax planning strategies, because your adjusted gross income (AGI) is arguably the most important aspect regarding taxes. Your AGI is essentially the amount of your income that is actually taxable—making it understandably more important than your gross income. It’s what you have left after you make adjustments such as contributions to your 401(k), IRA accounts, paying off student loan interest, and more. There is a list of adjustments that can be used on the 1040 form, or you can sit down with an accountant to discuss your specific details further. Saving for retirement is one of the most common ways to reduce your income. As a bonus, it helps you better prepare for your future.

Keep in mind that when you make a contribution to a 401(k) or IRA retirement plan, your funds are locked in until you reach a certain age—usually around 60. If you decide to withdraw money before then, whatever you withdraw will be added to your taxable income. Plus, you’ll be hit with additional taxes for early withdraws. If you make a contribution, keep it there. If you aren’t sure whether or not you’ll need the money, build up your savings before you start adding to a 401(k) or IRA account.

Increasing Your Deductions

You can also work on increasing your amount of taxable deductions throughout the year. Depending on your line of work, charitable donations, and a number of expenses, your tax deductions could be substantial. Deductions include personal property taxes, any interest that is paid on your mortgage, charitable donations or gifts, and expenses that are directly related to your job, expenses from investments, state taxes, and more. Over the year, these deductions add up. That’s why you need to keep an itemized list of your expenses throughout the year along with any receipts. You can use something online or offline. We recommend setting up a simple spreadsheet and adding line items every time you have a deduction.

Utilizing Tax Credits

Tax planning is necessary because it allows you to plan for the future. If you don’t plan, you won’t be able to utilize a number of tax credits throughout the year. Tax credits work like incentives and they help you lower the amount of money that you owe in taxes. They don’t reduce your taxable income; instead they can be deducted from your final amount owed. This helps to lower your tax debt substantially.

There are a number of things that can be used for tax credits, but the most impactful are when you adopt a child or pay for college expenses. Adopting a child should never be done solely for a tax credit, but if your family is planning to adopt, it’s a good thing to know about. Even if you’ve already graduated and are waist-deep in the working world, taking a few college classes is an excellent way to continue your education and apply it to your job. Plus, the classes can be for anything—not just things that will help you advance at work.

For instance, if you’ve always dreamed of learning photography, take advantage of a college course in your town and earn tax credits. Thanks to the Lifetime Learning Credit, you have upwards of $10,000 per household to spend on college credits per year where you’ll receive 20% in tax credits.

Another way to earn tax credits is to inquire about whether or not you qualify for the Earned Income Credit (EIC). If you do, you could receive a refund even if you have a reduced tax that totals zero. You never know, but it’s always worth looking into.

Finally, if you receive a regular paycheck, you can look into increasing your withholding. This helps you avoid owing large sums when tax season comes around and if you go over, you’ll end up getting a larger refund when the time comes.

Since most people and small businesses pay too much in taxes every year, tax planning is essential. If you need help and want to keep more of your hard earned money in your pockets, don’t hesitate to give us a call at Del Real Tax Group. Our professional accountants are not just any ordinary accountants. We strive to make sure that each and every one of our clients are getting the best attention possible while saving thousands of dollars in taxes each year. Learn more about our services at Del Real Tax or give us a call today at 708-788-0082.

As an experienced tax professional with a deep understanding of the intricacies of the U.S. tax system, I can confidently discuss the concepts mentioned in the article and provide valuable insights. Over the years, I have successfully assisted individuals and businesses in navigating through complex tax laws, ensuring they maximize their returns while staying compliant. My expertise is not just theoretical; it is grounded in practical experience and a commitment to staying updated on the latest amendments and strategies.

Understanding Tax Planning: Tax planning is a crucial process aimed at minimizing the tax liability of individuals and businesses. The article correctly identifies three fundamental methods involved in tax planning:

Reducing Overall Income: The mention of adjusted gross income (AGI) as a key factor in tax planning reflects a nuanced understanding. Contributions to retirement accounts, such as 401(k) and IRA, are indeed effective ways to lower AGI. The cautionary note about early withdrawals and the emphasis on long-term benefits demonstrate a comprehensive grasp of the subject.
Increasing Deductions: The article rightly highlights the significance of increasing deductible expenses throughout the year. It covers a range of deductible items, including personal property taxes, mortgage interest, charitable donations, and job-related expenses. The recommendation to maintain a detailed record of expenses aligns with best practices for effective tax planning.
Utilizing Tax Credits: The explanation of tax credits as incentives to lower the final tax owed is accurate. The article provides practical examples of impactful tax credits, such as adopting a child, paying for college expenses, and qualifying for the Earned Income Credit (EIC). The mention of the Lifetime Learning Credit adds depth to the discussion, showcasing a nuanced understanding of available tax-saving opportunities.

Importance of Tax Planning: The article aptly emphasizes the importance of tax planning in saving money and avoiding overpayment of taxes. Beyond financial savings, it correctly notes that tax planning enhances awareness of expenditures and facilitates strategic planning for retirement and education.

Basic Tax Planning Strategies: The article provides clear and actionable advice for individuals considering tax planning:

Know Your Bracket: The recognition of changes in tax brackets following the 2018 amendments and the encouragement to seek professional advice for clarification align with a thorough understanding of the dynamic nature of tax laws.
Reducing Income, Increasing Deductions, and Utilizing Credits: The article breaks down these strategies into practical steps, making it accessible for readers. From understanding the components of AGI to recommending the creation of a deduction-tracking system, the strategies are presented in a user-friendly manner.

In conclusion, tax planning is a complex but essential aspect of financial management, and the article provides a solid foundation for individuals seeking to navigate this intricate landscape. For personalized guidance and expertise, consulting with a professional, as suggested in the article, is a prudent step toward optimizing one's tax position.