Tax planning helps individuals and businesses to plan ways in which they can reduce their tax liability and minimize the taxes they pay. There are tax planning strategies which you can utilize in order to minimize tax. You should take advantage of tax deferrals which will relieve you of tax in the current year until a future date.
There are federal taxes, state taxes, local authority taxes and others. These taxes include income tax, sales tax, excise taxes, stamp duty, inheritance tax, estate tax and capital gains tax among others. Tax planning depends on whether it is an employed individual, self-employed, a business or corporation.
Tax is charged on adjusted gross income and so the higher it is the higher the tax will be. Tax Planning can reduce your tax liability by reducing your income. This can be achieved by increasing your contributions to Traditional Individual Retirement Account IRA or the employer 401(k) retirement plan because the contributions you make are tax deductible. When you add your contributions to an employer retirement plan your salary will be lower and the income tax charged will be less. Money withdrawn from retirement plans before the retirement age is added to taxable income and charge tax. Contributions towards life insurance and health care insurance are also exempted from tax.
Tax planning helps you reduce tax liability by increasing tax deductions. The tax deductions include student loan interest, taxes, mortgage interest, gifts to charity, alimony paid, expenses which are related to employment and investments and others. Money invested in 529 Savings Plan is tax deductible. However early withdrawals from the Plan are taxed and a penalty is charged.
There are different tax credits and you should learn what tax credits you are entitled to. Tax credits reduce the tax to be paid. Tax credits and tax breaks are given for college expenses, retirement savings and tax credits for child adoption. Taxpayers who have qualifying children are entitled to Earned Income Tax Credits which depends on the number of qualifying children. The taxpayer can claim tax refund based on the tax credits if the tax due is zero or lower than the tax credit.
When calculating taxable income the taxpayer should deduct all personal exemptions or personal allowances for their children, spouses and dependants. People who have their own children, step-children, adopted children and spouses who have no income, are allowed to deduct personal exemptions from their taxable income.
Estate taxes, inheritance taxes and gift taxes are charged on the taxable properties and assets transferred to beneficiaries subject to certain tax exemptions. Estates can be transferred to beneficiaries through life insurance benefits which are usually tax exempt.
Employers withhold payroll taxes from the employees as P.A.Y.E or PAYGO. The employee is supposed to file an income tax return and a self-assessment treating the payroll tax as a prepayment. Self-employed people are allowed to pay spouses and their dependent children wages which reduce taxable income. Tax Planning is very important to all taxpayers.