Saving money on taxes is just as important as increasing your income. Whenever you pay more in taxes than you have to, you jeopardize reaching your financial goals. Smart tax planning involves finding short- and long-term strategies for limiting your liabilities and holding on to as much of your cash as possible.
Reducing Tax Liability
Tax planning starts with identifying effective strategies for managing your income and capitalizing on all suitable tax deductions, as well as making sure your tactics are legal. For example, if you own a business, you might be able to lower your taxable income by devoting some of the business’ yearly income to strengthening the company, perhaps by buying new equipment or expanding operations. Now your money is working toward your financial goals instead of heading off to the government. Another strategy is to capitalize on a changing tax rate by postponing receipt of some of your income until the next tax year, when your tax rate is lower, according to the book “Personal Finance,” by E. Thomas Garman and Raymond E. Forgue. Such tactics can drastically decrease how much you owe.
Finding Suitable Credits and Deductions
Tax planning also involves taking advantage of tax credits, which offer easy savings -- if you know about them. For example, during a home renovation, installing green technology, such as insulated windows and energy-efficient appliances, might qualify you for a federal tax credit. Effective tax planning seeks out and capitalizes on all tax credit opportunities, possibly significantly lowering taxes.
Smart tax planning also includes developing strategies for handling life transitions and long-term financial goals, such as growing your money in the stock market, paying for your children’s education and saving for retirement. For example, if you plan to buy a retirement home but need to sell stocks to fund the purchase, it might make sense to postpone liquidating your investments until you’ve retired and are in a lower tax bracket. Estate planning is also a vital element of tax planning, ensuring your family isn’t left with a large tax burden should you suddenly die.
Hiring an Expert
If you’re well-versed in financial management and accounting, or just enjoy crunching numbers, books and tutorials are available to help you master nearly any personal tax situation. But for many people, hiring an experienced tax professional or financial planner is the most cost-effective way to handle tax planning. For example, staying abreast of yearly changes in federal, state and local tax regulations is a daunting but necessary part of smart tax planning. Hiring an experienced tax lawyer to offer guidance could supply valuable insight into how recent changes affect your financial picture.
Stan Mack is a business writer specializing in finance, business ethics and human resources. His work has appeared in the online editions of the "Houston Chronicle" and "USA Today," among other outlets. Mack studied philosophy and economics at the University of Memphis.