In January 2021, the state of Oregon introduced two new income taxes: the Multnomah county and the metro tax. While there is no foolproof method to avoid these bills, careful forethought and advice from a credible financial advisor in Oregon, such as Interactive Wealth Advisors, can help you lower your tax burden. Here, we look at five simple tax planning strategies to help you save.
What Is Individual Tax Planning?
This is the process of identifying and structuring your investments, pensions, insurance policies, debts, and other financial arrangements to minimize the amount you owe. Individual tax planning includes using your income and assets to minimize your tax bill.
What Are the Different Types of Tax Planning?
There are different types of tax planning, and your unique circumstances determine the right one for your business.
1. Short-range Tax Planning
Taxpayers use this type to look for lawful methods to reduce their tax liability as the fiscal year concludes.
2. Long-term Tax Planning
This begins at the start of the fiscal year and continues throughout the year. Its effects are only apparent in the long run.
3. Permissive Tax Planning
This takes advantage of legitimate tax law provisions that allow you to minimize the amount you pay.
4. Purposive Tax Planning
Utilizing this type looks at the tax benefits to be gained from decisions about spending habits, where to invest your money, and career changes.
Why Is Tax Planning Important?
Income tax planning is essential for a number of reasons. It helps you build your personal finances in a way that best suits your personal preferences. Moreover, by factoring in taxes while creating your financial projections, you can dramatically increase your retirement nest egg. Most of all, it also helps you avoid future problems with the IRS.
Strategic tax planning is the linchpin of financial success, essential for individuals and businesses alike. It involves a meticulous understanding and adept utilisation of tax laws, a practice that empowers individuals and enterprises to minimise their tax liability, preserving a greater portion of their earnings. Through effective tax planning, one can leverage an array of deductions, credits, and exemptions, further alleviating the overall tax burden. This forward-thinking approach not only fosters financial stability by providing a clear projection of future tax obligations but also facilitates more astute budgeting and investment decisions. For businesses, tax planning is a cornerstone of competitiveness, influencing pricing strategies, employee benefits, and overall profitability. In particular, understanding Arizona sales tax regulations is crucial for businesses operating in the state, ensuring seamless compliance with local tax mandates. In summation, tax planning represents a proactive financial management strategy, ensuring that both individuals and businesses retain the maximum amount of their hard-earned money while upholding their legal obligations.
Three Examples of Good Tax Planning
There are many ways to save on tax. Here are some examples of tax planning strategies for individuals that work:
1. 529 Plans
One good tax planning example is the 529 plan. This is a tax-deferred savings account that helps pay for college expenses and other qualified education costs. You contribute after-tax dollars to a 529 account, so it is a great way to save.
2. S-Corp for Self-Employed Individuals
If you are an entrepreneur looking to start up your own business, an S-Corporation might be the right choice. This type of corporation has its own separate legal identity from the individual who owns it. By using an S-Corporation, you pay only your personal rate on the profits of your business.
3. Bunching Charitable Contributions
Many people make charitable donations each year, but they do not know how much they can claim. By bunching together your contributions over time, you can claim itemized deductions in some years and the higher standard deduction in others.
Five Tips and Best Practices for Effective Tax Planning
Are you ready to get started with your tax planning process? Here are five tips for tax planning to help point you in the right direction.
1. Understand Your Tax Obligations
Before you begin, you first need to know what you owe. Thankfully, the IRS has a handy online tool that tells you the amount that you are liable for. This information will come in handy when creating tax optimization strategies.
2. Stay Up-to-Date with Tax Law Changes
The IRS makes changes to the tax code regularly, so it is important that you stay informed about any new rules or changes that could affect your taxes. Check out the IRS website and other reliable sources to stay up-to-date on any new laws and rules or amendments that may apply to your situation.
3. Keep All Documentation Current
It is important that all of your documents are up-to-date and accurate at all times. If a mistake is made on one form, it can cause a delay in processing time and may cause additional fees for you.
4. Use Tax Planning Software
Using a tax planner is a great way to do your taxes yourself. Good software will calculate all costs, expenses, income, and deductions quickly and accurately so that you can see where to make savings.
5. Take Advantage of Deductions
The tax code is filled with deductions, credits, and other breaks for taxpayers who itemize their deductions. You should always try to maximize your deductions as much as possible. Commonly claimed deductions include those for medical costs, charity donations, state income taxes, and tuition costs and fees.
How Can Interactive Wealth Advisors Help?
There are several ways to get started with strategic tax management. The best way is by working with a qualified tax advisor. A professional advisor, such as Interactive Wealth Advisors, will be able to help you with any concerns, saving you both time and money.
Here at Interactive Wealth Advisors, we will work with you one-on-one to create a personalized tax plan. Even with your tax planning methods all set up, we will always be there to answer questions, tweak things, and generally make sure that you can save as much as is legally possible.
