Everything You Need To Know About Tax Planning Strategies
July 23, 2024 |
Tax planning plays a crucial role in ensuring your financial stability and achieving your long-term goals. You may be a small business, or an individual looking to potentially save money; but by understanding tax planning strategies, you can minimize your tax payments, maximize your savings, and secure a stable financial future. In this blog, we'll explore the importance of tax planning, and key strategies to consider.
Why Tax Planning Matters
Tax planning is more than just numbers, it is a variety of strategies that can significantly impact your financial well-being. With an effective tax planning strategy With an effective tax planning strategy, you can optimize the amount of taxes owed, plan cash flow, and gain a better understanding of your tax liability. Investing time and effort into effective tax planning is an investment in your financial future.
Understanding Tax Planning
Net profit vs revenue
Business owners pay tax on net profits, not gross revenues. Gross revenue is all of the income collected during tax year. While net profit is calculated as gross profits less deductible expenses. Eligible business expenses include but are not limited to, insurance, employee benefits, utilities, advertising, and payroll.
Business Legal Structure
The income tax your business pays is affected by the structure of your business. For example, partnerships and sole proprietorships are both regarded as pass-through entities. That means any income flows to your personal tax return and is taxed at your personal tax rate. C corporations are taxed at a flat 21% corporate tax rate.
Other tax liabilities
You may think this is the end of taxes, but there are many more to consider, including self-employment tax, net investment income tax, pass-through entity tax, and estimated tax payments.
Self-employment Tax
The self-employment tax is a 15.3% tax imposed on individuals who work for themselves. This tax includes Social Security and Medicare taxes which are typically withheld from W-2 pay.
Net Investment Income
Tax: This tax only targets high-income individuals or families, over $200,000 and $250,000 for those married filing jointly. The tax imposes an additional 3.8% tax on investment income such as interest, dividends, capital gains, rental, and royalty income.
Pass-Through Entity Tax
This tax applies to businesses such as partnerships or S corporations. Recently enacted by many states to help circumvent the federal limitation of state and local tax deduction. Pass-through entities pay their owner’s state liability at the entity level, and pass out a credit which the owner claims on their personal state income tax return.
Estimated tax payments
Similar to self-employment tax, individuals who are self-employed are required to pay estimated tax payments to both the IRS and state tax authorities. Because self-employed individuals' income is not subject to tax withholding by an employer, they need to estimate and pay quarterly.
Common Questions About Tax Planning
What is Tax Planning?
In short, Tax Planning is taking advantage of tax law to reduce your tax liability. This includes utilizing your standard deduction, deferring taxes, and other deductions. By using those strategies, you are able to pay the least taxes based on your financial situation.
Is there a difference between Tax Preparation and Tax Planning?
Yes, you are looking at the prior year when you prepare your taxes. This strategy is reactive. You cannot alter history once December 31st of each year has passed. Everything that you may have used to lower your tax obligation is no longer available.
By using tax planning, you're being proactive. It is centered on the present and the future. For instance, consistently getting a sizable refund indicates poor tax preparation. As a taxpayer, you could have invested that money in your retirement account, paid for your child's college education, or even launched a side business.
Who needs Tax Planning?
Although tax preparation is frequently thought to be beneficial mainly for rich taxpayers, the truth is that anyone, regardless of income level, can profit from it since what matters most is how much money you keep rather than how much you produce.
You take the time to plan a lot of things in your life, like vacations and holiday parties. Why not put that same effort into planning to reduce your tax liability? The better you plan, the better you are prepared when it comes time to file your taxes.
Why choose Greg Reimann, CPA
With the trusted expert you’ll find at Greg Reinmann, CPA, we’re not just going to help you save money, but we’re going to help you tax plan effectively for the entire life of your business.
We are your trusted business advisor that’s here to bring clarity to your finances so your business can achieve its goals.
To learn more about our services, book a tax planning consultation, contact us today.
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