Looking for ways to reduce your tax liability this year? P3 Accounting has got your back! We've compiled the top 10 tax planning success strategies that can help you maximize tax savings and achieve your financial goals more effectively. Whether you're a business owner or an individual taxpayer, these tax planning strategies can help lighten your tax burden for a more successful tax year.
What Are Tax Planning Strategies?
Effective tax planning strategies are techniques used by individuals and business owners to reduce their tax bills. These tax strategies require you to analyze and understand your finances to lower the taxes you have to pay, and for entrepreneurs, to boost their business success.
How to Develop a Valuable Tax Planning Strategy
1. Set Clear Financial Goals
Smart tax planning starts with setting clear financial goals. This means identifying what your priorities are when it comes to your finances. This could include prioritizing savings, planning for retirement, or reducing your tax bill to keep more of your salary or business profits. Whatever they may be, the first step to developing tax planning strategies is to figure out your specific goals, which can help you make smarter financial decisions that align with your objectives.
2. Make the Most Out of Tax-Advantaged Accounts
Tax-advantaged accounts refer to financial accounts that offer tax benefits to help you pay less in taxes. Accounts like Health Savings Accounts (HSAs), Flexible Spending Accounts (FSAs), 401(k)s, and Individual Retirement Accounts (IRAs) can reduce your taxable income.
Health Savings Account (HSA)
When you make pre-tax contributions to your HSA, you'll have a lower taxable income for the year. The money in your HSA grows tax-free, so you gain interest without it being taxed. Additionally, you can enjoy tax-free withdrawals when you use the money in your HSA for eligible expenses like medical and dental expenses.
Flexible Spending Account (FSA)
Similarly, the money you put into your FSA can be deducted straight from your paycheck before any taxes are applied. This lowers your taxable income, which leads to a lower tax bill. Additionally, if you make qualified expenses like prescription medications, medical expenses, or dependent care costs, you're reducing your taxable income because there are paid with pre-tax money.
401(k)
You can deposit money into your 401(k) before taxes are taken out on your paycheck. Similar to HSA, you'll have a lower taxable income and the deposits you make grow tax-deferred, meaning you don't have to pay taxes on them until you make a withdrawal in the future.
Individual Retirement Account (IRA)
Traditional IRAs: Like 401(k)s, you can reduce your tax bill by deducting contributions from your taxable income. The money you deposit in a traditional IRA will grow tax-deferred, so you don't need to pay taxes on it until you withdraw the amount.
Roth IRA: When you make contributions to your Roth IRA, you don't benefit from tax breaks, but your interests and withdrawals in the future are all tax-free.
3. Keep Accurate Records
Keeping accurate and organized records may seem like an obvious tip, but it still deserves emphasis. It's the foundation to most success strategies that can help you minimize your state and federal income taxes. So, don't forget to track your income and expenses throughout the tax year. Doing so can make filing tax returns easier and helps you spot tax credits and deductions you're eligible for.
4. Strategically Time Your Income and Expenses
If you're in a higher tax bracket this tax year, you can defer income to the following tax year when you might be in a lower bracket. This means you can reduce your income tax for the current year. On the other hand, if you're in a lower tax bracket, you can choose to receive extra income or bonuses early, accelerate income, or make deductible purchases to take advantage of your lower tax bracket. When you do this, you'll have a lower overall tax bill.
5. Claim All Possible Tax Deductions
Taking advantage of all possible tax deductions is a surefire way lower your income taxes, which leads to tax cuts. Here are some of the tax deductions you might be able to claim and subtract from your adjusted gross income (AGI).
Mortgage interest
Charitable contributions
Home office deduction (for those who work from home)
Student loan interest
Specific medical expenses
State and local taxes
Retirement contributions
6. Check for Tax Credits to Lower Your Tax Bill
Another tax benefit you can take advantage of to reduce your tax bill is a tax credit. It's a dollar-for-dollar reduction of your tax liability, so if you have a total of $1000 in tax credits, it reduces your tax bill by $1000. This differs from a tax deduction which reduces your taxable income rather than the tax bill itself.
Here are some examples of tax credits in the US:
Child Tax Credit: For those with dependent children under a specific age.
Earned Income Tax Credit (EITC): For low- to moderate-income individuals.
Education Credits: These tax credits can help lower the expenses related to higher education.
Child and Development Care Credit: This reduces childcare expenses for working parents.
Energy-Efficient Home Improvement Credit: If you're making energy-efficient upgrades to your home, this credit can help cover the costs.
7. Manage Capital Gains and Losses
Keeping track of your capital gains and losses as well as strategically selling investments can potentially lower your tax bill. Here are some concepts to keep in mind so you can handle your money more effectively:
Capital Gain
This refers to the profit you make when you sell an investment for a higher amount than what you paid for it. It's the money you earn on top of the original price you got it for.
Short-Term Capital Gains
The profit you make from selling an investment you've held for less than a year is called a short-term capital gain. Typically, these are taxed at higher rates, similar to ordinary income.
Long-Term Capital Gains
If you sell an investment that you've owned for more than a year, it's called a long-term capital gain. In contrast to short term capital gains, long term capital gains are taxed at lower rates.
Offset Capital Gains Taxes
You can deduct your capital losses from your taxable capital gains. For example, if you earned $5000 in capital gains but you have a $1000 loss, you only have to pay $4000 in taxes.
Tax Loss Harvesting
Tax loss harvesting refers to a strategy where you sell an asset or investment for less than what you originally paid for to offset capital gains. Doing so means you have a lower amount of taxable gains and that your overall tax bill can be reduced.
8. Review Your Tax Plan and Adjust Regularly
Tax laws evolve constantly, so it's important to stay updated throughout the tax year. This way, if there are any relevant tax law changes, you can adjust your plans accordingly and still reduce your overall tax burden. Additionally, personal things like life changes, a new job, or major purchases can also affect your tax planning strategies, so always keep track of them and ensure you're taking advantage of all the possible credits and deductions throughout the year.
9. Review Your Business Structure to Reduce Corporate Income Tax
If you're a business owner, it's important to review your business structure. This means looking at how your business is currently set up and determining if there's a more tax-efficient way to operate. For example, you can evaluate and check whether your business might be better off as an LLC, sole proprietorship, partnership, or C corporation. Each of these structures have different tax implications, so changing your business structure to a more suitable structure can potentially reduce your tax bill.
10. Consult a Tax Professional
Whether it's to help you file a tax return or plan out a tax planning strategy for the year, there's no harm in hiring a tax advisor to assist you. These professionals can help you understand specific tax laws, provide accounting services, and offer personalized advice based on your unique circumstances.
P3 Accounting: Your Trusted Partner for Successful Tax Planning
You can never go wrong with P3 Accounting. Trusted by entrepreneurs and small business owners throughout the United States, we're one of the best accounting firms in the country offering expert tax planning and financial advisory services.
Contact us at 405-265-8383 to learn more!
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