What is The Goal of Tax Planning?
Tax planning is an essential part of any financial plan and can involve strategies related both to income and investments. Almost all financial decisions have tax consequences, thus it is important to work with an advisor who knows how to develop an appropriate tax strategy. The goal of tax planning is to take advantage of appropriate tax strategies, including deductions, credits, deferrals, etc. to reduce one’s tax liability.
What Is Involved in Tax Planning?
Tax planning involves developing strategies to accomplish your financial objectives in the most tax efficient way possible. Key issues include:
Reducing Income
A key factor in determining how much tax will be owed is your adjusted gross income. This figure is the amount of income that you earn from all sources, less any adjustments to that income. Reducing your adjusted gross income helps in reducing the amount of taxes you will owe. This may be done in a number of ways, including contributing to a qualified retirement plan such as a 401(k) or IRA account, and paying interest on certain debt such as student loans.
Increasing Tax Deductions
Your taxable income is the amount that is left over after your adjusted gross income has been reduced through tax deductions and exemptions. Once the amount of taxable income is determined, you may able to further reduce your tax liability by taking various deductions that you are entitled to. Most taxpayers are eligible to take a standard deduction, and others are allowed to itemize deductions on their annual tax returns. Some of the most significant deductions are those for mortgage interest, charitable gifts and state taxes.
Using Allowable Tax Credits
Once adjustments and deductions have been determined, you may also qualify for tax credits that can further reduce your tax liability. Some of the more common tax credits include the earned income credit, tax credits for college expenses, and those that are available for the adoption of a child.
Tax planning is one part of an overall holistic financial planning approach. With holistic financial planning, all of your objectives – both financial and otherwise – are analyzed and then planned for using strategies and tools that are specific to helping you move closer to your goals.
Contact us today so we can together analyze the most appropriate tax reduction strategies for you, while striving to give you maximum use of your income.
