Three Basic Tax Planning Strategies You Should Know
For business owners, tax planning is among the most tedious and most anxiety-inducing things you need to do. Sure, a tax savings calculator can help simplify the process a little bit more but you would need the right tax planning strategies you can find.
If you don’t know how to go deep into the tax code, tax strategies are a must-have to reduce potential struggles with your finances. Then again, not everyone knows even the most basic strategies out there. Here are three of the most basic but powerful tax planning strategies that everyone must know.
#1. Ramping Up Your Charitable Contributions
Charitable giving is among the most prevalent ways to get good tax deductions. Not only do you give for the benefit of others, but you’re also doing yourself a major favor. When you give to charity, you can get some major tax deductions, as well as save extra money for your future heirs.
Depending on your situation, it’s best to do charitable donations during a year where you have a high income. If you received a big bonus or sold off property, consider if you can combine several years of donations in one large and chunky donation that can cut result in a hefty deduction for you.
The Tax Cuts and Jobs Act set up a higher standard deduction for many taxpayers but not everyone can itemize their deductions annually. If you group your donations, deductions can be itemized during the high-income year, then use the standard deduction for the other years.
Taking Advantage of Charitable Remainder Trusts
Another way to get tax deductions for charity is through charitable remainder trusts. These are tax-exempt irrevocable trusts designed to reduce taxable income. Donors can send a gift of cash or other types of properties, and convert them into lifetime income, usually for your estate or charitable institutions.
This is a great way for you to sell a high-value property, usually stocks or real estate, and pay fewer taxes outright. By transferring the property to a CRT, you can get an immediate charitable income tax deduction. You also get a reduction in your federal income tax that changes according to your current tax bracket.
These trusts can reinvest the money, as well as provide you with a consistent income. You or your heirs can get a percentage of the value in annual income. Due to their irrevocable nature, these investments are also safe from potential creditors.
#2. Improving Your Tax Knowledge
Among the most basic tax planning strategies you can do is understanding the concepts that can give you the biggest tax deductions. Knowing which areas of your taxes you can work around, which areas save you money, and knowing what tax records to keep gives you a good idea on the next best financial move.
Tax Brackets, Deductions, and Itemizing
First, understand what your current tax bracket entails. The United States has a progressive tax system, which means it’s unlikely for you to pay the full percentage of your tax bracket. Most taxes are cut into chunks, where you first pay only a certain percentage of what falls into the bracket.
You should also understand the difference between tax credits and tax deductions. By knowing these nuances, you can apply other tax strategies and maximize your benefits.
Tax deductions are expenses incurred that you can subtract from your taxable income. On the other hand, tax credits are deducted straight into your calculated tax, which is better because this goes as a 1-to-1 reduction.
You also need to understand the difference between standard deduction and itemizing. The right choice can also have a significant impact on your tax bill.
Standard deductions are flat-dollar tax deductions that allow for tax preparation to go faster. Standard deductions adjust every year, accounting for inflation.
Itemizing tax returns means listing down every individual tax deduction that somebody qualifies for. When broken apart and properly itemized, every deduction will add up more than the standard deductions.
Taking Advantage of Better Tax Knowledge
If you’re having a hard time learning these concepts or want to streamline everything, it’s best to choose the right financial advisor. Most financial advisors can explain tax concepts, as well as the best way to deal with your money.
They can help you understand the proper tax records to keep, especially if the IRS ever decides to audit you. You can also hang onto tax records for three years if you need to file a claim, whether it’s for a refund or a tax credit.
#3. Starting Your Own Business and Self-Employment
If you’re looking to lower your tax bill, another way to do it is to start your own business. Business expenses can be deducted from those looking to get a small business started. There’s also taxation for self-employed individuals, which helps soften the blow when you have to shoulder all expenses.
Several tax laws had different effects over the years, with tax deductions for business owners and the self-employed. So it’s important to review things that you’re allowed to deduct each year to help your business build more profits.
For example, you’re allowed tax deductions for your business startup in three categories. These include costs incurred during the creation of your business, launching your business, and business organization costs.
Maximizing Your Business and Self-Employment Deductions
There are several areas of your business and work as a self-employed individual that will cut down your taxes. For example, there are ways to calculate a deduction for a home office and vehicles used for business purposes.
Some small areas of your business, like meals with clients, are also tax deductible but only within specific limits. Business startup deductions are also capped at $5000 for the first year for costs at $50,000 or less.
Remember that it’s crucial to understand several details of starting a business. It’s also vital that you start the business, otherwise your expenses will be listed as personal costs and are not deductible.
The Bottom Line
Taxpayers rush towards finding ways to reduce their tax bills. Tax strategies are a must-have to improve your net profits and get more out of your income. A complete tax plan gives you great rewards today and in the future.
The basic tax strategies we have for you above are a great way to get the tax deductions you deserve. The key is to have a tax planning strategy that is thorough, flexible, and adaptable to current tax situations.