Many Americans dread tax season, and who can blame them? Navigating ever-changing tax laws is time-consuming and stressful, and coming out of the process with an unexpected balance due is frustrating. Tax planning is the most cost-effective way to eliminate the stressors of tax season and save money on taxes long term, but many individuals and small business owners doubt it’s necessary. Instead, they favor a once-yearly meeting with their CPA. This short-term thinking leads to long-term loss, causing taxpayers to miss out on numerous strategies for reductions on their overall tax bill.
Tax Planning Clarifies Your Financial Profile
A lot of tax discussions operate around which tax bracket you fall into. Tax brackets work by grouping taxable income with tax rates, so a higher taxable income equals a higher tax rate. Taxable income includes all adjustments and deductions.. The taxable vs. not taxable list is long enough for a second blog, but the key is that taxable income adjustments enable taxpayers to work themselves into a lower tax bracket.
Tax planning focuses on managing the tax bracket, determining the number and extent of deductions applicable to the client, and ensuring that the client’s taxes stay as low as possible in the long run. These factors may change over time, and it is essential to hire an expert who can determine the best strategy for a growing and changing business.
Qualified tax planners will determine the best strategies for their clients in each particular year as well as holistically. They will look at the big picture to inform year-over-year strategies that could lead to large cost reductions. An important element that a tax planner considers for optimal tax planning is marginal tax rate and effective tax rate. A marginal tax rate calculates the amount of taxes collected on your highest income ; whereas, the effective tax rate calculates the percentage of taxes that you pay based on your entire taxable income. Marginal and effective tax rates can have different benefits depending on the financial profile. Tax planning experts will help simplify these choices and find the option that will yield the greatest financial return year after year.
Strategies for the Future
Tax planning ensures that long-term financial goals are met through various available deductions, understanding the structure of your financial profile, and considering the exchange of assets. For instance, charity bundling is a long-term strategy for charity-related tax reductions.
When itemizing deductions, a taxpayer can deduct their charitable donations from their taxable income. These deduction strategies vary, but bundling a few years’ worth of charitable contributions can provide a greater tax reduction than not bundling. In these cases, the itemized amount must be higher than the standard deduction to fully capitalize on the tax reduction. A professional tax planner can determine the strategy with the highest return.
Strategies For Right Now
Planning your taxes ahead of time means that, when tax season rolls around, you will know what to expect. However, regular tax planning also ensures that you are up-to-date on your financial status at all times. For taxpayers with complex portfolios, proactive tax planning is essential. The key is to mitigate losses and recoup profits. A tax planner will be able to identify areas of concern before it’s too late.
Tax-loss harvesting is one essential strategy under this risk-mitigation banner that applies to people or businesses with various investment assets. It involves selling an investment that lost value and buying another investment with the difference, therefore providing a tax reduction to overall capital gains. This strategy can help offset potential investment losses. Taxpayers will benefit from working with a professional on tax-loss harvesting strategies because action must be taken at the right time and with a clear understanding of the balance of gains and losses the taxpayer will face.
Tax Planning Covers All Bases
Even if your financial history and portfolio are straightforward, the benefit of having a tax planner means never having to worry about inaccurate filings—which can lead to audits—or missed deadlines.
Missed deadlines result in fees and make a taxpayer’s overall payment to the IRS even higher. A tax planning specialist can help remedy the complex issues that come with late filing and minimize the number of fees incurred. If you miss a deadline, it’s crucial to have an expert on hand who can file your taxes quickly and accurately so that you don’t incur any more fees. That said, if something does need to be fixed urgently, you will have a professional who is already familiar with your financial status and can easily remedy the issue.
Due to the ever-changing tax laws and programs, taxpayers run the risk of needing to file forms that didn’t exist in years prior. During the COVID-19 pandemic, American business owners received aid from the government through initiatives like the Paycheck Protection Program. These offerings were unique to pandemic initiatives and were not a part of annual tax filing until this year. Thankfully, tax planning experts actively research these programs, building extensive knowledge about the nuances and qualifications, so that you can take advantage of the benefits while avoiding costs.
Tax planning provides individuals with a big-picture strategy that encompasses the details of the here and now. A proactive strategy like this will lead to major reductions and increased returns that may otherwise be overlooked by taxpayers. Tax planners have a deep understanding of tax laws and programs, enabling them to create a custom plan for each client that continues to adjust and adapt with the times. Tax season becomes a lot less stressful when you plan ahead with an expert.
When you’re ready to learn more or get started, contact us to get matched with an expert.