Tax planning is the term for creating a financial plan that will reduce your overall tax burden in the long-term. In general, income tax is a percentage of your earnings that goes to the government. However, the government offers discounts for certain types of activities that affect how your tax bill is calculated, thereby increasing your potential tax refund.
Here are some common tax planning techniques:
Review Available Tax Deductions
The government offers deductions or uses for pre-tax income with certain types of activities including education and retirement expenses. For example, you can pick a retirement plan early on that will save you taxes in the long run. Also, there are several possible business deductions such as travel expenses or depreciation that may affect your taxes over the course of many years. Trying to reduce taxes immediately may cause you to pay more taxes in the long run and tax planning can reduce this burden.
Apply Tax Credits
Similarly, the government offers tax credits for certain activities. Personal tax credits include child care credits, education credits, and healthcare credits. Depending on your situation, you may qualify for tax credits. The tax planning comes in because some of these have limits or may need to be used over the course of several years, which you will need to plan for.
Use Employer Withholdings
Another way to plan for your tax bill is to make sure for you have had the proper income tax withheld based on your status as employee or independent contractor, and the number of exemptions and/or allowances your qualify for. You may also ask your employer to withhold more money from your check in order to get a larger tax refund at the end of the year.
Do I Need an Attorney to Help Me with My Tax Problems?
Tax laws are complex and ever-changing. Although there are various types of tax preparation software on the market that may help you with your immediate tax preparation, they may not be able to give you tax planning assistance for years ahead. If you are interested in finding out what tax planning options are available based on your situation, a tax attorney can help you.