How To Think More Clearly About Tax Planning
Posted on: 2 February 2021
Tax planning is a way to get in front of the potential bills you might owe in the future to the government. A major goal is to focus on creating the conditions for tax benefits long before the bill comes due. Short of that, you at least want to avoid putting yourself in a worse position on the tax front.
It's important to think clearly about what can and can't happen throughout this process. Here are three ways tax planning services providers encourage their clients to prepare for the future.
Examine Goals
Many tax benefits are aimed at specific goals, and there are often matching problems between how people plan versus what they should be doing. If you're aiming to minimize your tax bill now and into retirement, for example, you'll want to max out your 401k. Not only will the payments be deductible now, but you'll face a lower tax bill due to lesser earnings after you've retired and taken the money out. It's a win-win, exactly as the program intends.
Conversely, you don't want everything tied up in the 401k if you need to save for a child's college years. Fortunately, there are tax-preferred plans for that scenario, too. The same goes for starting a business, buying a home, or any of a host of life goals.
Examine Assets and Liabilities
Most importantly here, it's wise to look at every liability as a way to either deduct money or reduce your baseline income for taxation. If you were planning to sell a piece of real estate at a loss, for example, it's best to think about whether the loss should go on this year's or next year's taxes. If you had an especially bad year this year and expect a much better one next year, it might be best to hold off on the sale until you'd get greater tax planning benefits from the transaction.
Applicable Rules
One of the worst mistakes you might make is using the wrong set of rules to handle your taxes. If you're currently running a business as a sole proprietor rather than an LLC, for example, you don't want to file as an enterprise. You should set up your business appropriately to ensure you can maximize the possible tax benefits. Likewise, you want to avoid misreporting your income a certain way; otherwise, you might face penalties and fees once it comes time to straighten things out.
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