Tax planning is crucial for businesses and individuals to help achieve financial goals. But what exactly is it? Let’s go over some of the most frequently asked questions about this service.
What is Tax Planning?
Tax planning is the analysis of a financial situation or plan in order to maximize tax breaks and minimize tax liabilities in a legal and efficient manner. This helps to ensure you have the most “tax-efficient” outcome. For this service, you’ll sit down with a tax professional and go over considerations with them, such as timing of income, size, timing of purchases, and planning for expenditures. They’ll then use that information and their knowledge of applicable tax breaks to help you keep more money in your pocket.
There are a few types of tax planning that can be beneficial depending on your goals. Let’s go over some of the ways:
- Short-term planning. This planning is executed at the end of the fiscal year. If you find that your taxes are too high in comparison with last year, you can make arrangements to get them reduced before the end of the year through tax planning. This doesn’t involve long-term commitment but results in substantial tax savings.
- Long-Term Planning. This planning is done at the beginning of an income year to be followed until the end of the year or the next several years. This doesn’t offer immediate tax benefits but is more beneficial in the long run.
- Purposive planning. This is planning with a specific purpose to ensure availability of maximum benefits through a correct selection of investments, replacement of assets, varying residential status, and diversifying business activities and income.
When Should I Think About Doing This?
Depending on the type of tax planning you choose, this answer can vary. However, it’s safe for us to say that this service should happen every year and every time there is a major financial or life decision made. Even if you choose short-term tax planning, thinking about tax season early and doing what you can to reduce your tax liabilities can make a monumental difference when it comes to your bottom line.
Is There a Difference Between Tax Preparation and Tax Planning?
Short answer: yes.
The long answer is that tax preparation is more of a reactive approach. Once you hit January 1 of the new year, you can’t go back to change your taxes. Anything you could have taken advantage of to reduce your tax liability is over. However, tax planning is a proactive approach. The focus is on today and the future, and what can be done to put more money in your pocket.
If you’re looking for an even longer answer that goes into depth about these services and their differences, we’ve written a separate blog post about this question.
Is This Service for the Wealthy?
No, this service certainly isn’t just for the wealthy. Even though tax planning is often looked at as a benefit to only wealthy taxpayers, the truth is anyone can benefit from this service. It’s not about how much you make, it’s about how much you keep.
A tax plan allows you, no matter your income, to take as many breaks as possible and work within the tax law to increase allowable deductions and credits. If you find yourself at tax time thinking about how you should’ve itemized more deductions or put off a significant transaction, you will benefit from tax planning services.
Who Needs This Service?
Again, anyone can benefit from this service. But those that really need tax planning will be business owners, real estate investors, and long-term investors.
Business owners can implement tax planning through entity selections. That means how you register your business as a legal entity can have a huge impact on your taxes. Effective planning can also help your business retain more of its valuable capital for reinvesting in future business ventures or increase the take-home pay of business owners and employees.
For real estate investors, real estate can be your primary or secondary source of income. It all depends on how you hold it and make it work to your advantage for tax planning. Tax planning can also be great for long-term investors as working with a tax professional can mean creating a plan that will benefit you long-term.
Our experts are here to answer your questions and guide you in the right direction for financial success.
Need Tax Planning Services? Gaylor Tax Service is Here to Help
At Gaylor Tax Services, we provide professional tax assistance with tax planning and help you save the highest amount possible. Our experts are here to answer your questions and guide you in the right direction for financial success. No matter what, don’t hesitate to contact us. We are located in Phoenix, Arizona but can assist you anywhere in the state.