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The Obvious Benefits of Tax Planning

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  • The Obvious Benefits of Tax Planning

    If you are self-employed and you are making money - you need to consider the obvious benefits of tax planning strategies. Period! It does not matter whether you are a sole proprietor, a partner in a partnership or a shareholder in an S Corporation. If you are successful in your business venture and have a positive cash flow - you need tax planning.

    Our tax system is a pay-as-you-go system. The taxing authorities (the IRS & your state tax commission/department of revenue) expect to receive your estimated tax payments evenly throughout the year on income you are earning. The purpose for tax planning is to mitigate any taxes due when it is time to file your tax returns. Some strategies to reduce taxes include: reducing your income, increasing your expenses and taking advantage of applicable tax credits.

    One of the easiest ways to reduce your income on your individual tax return would be to contribute to a retirement plan. Whether you put the maximum into an IRA, 401k, SEP or other type of retirement plan, these dollars reduce your taxable income and lower your tax bill. You get to keep more of your money - even though you technically cannot touch it until you are of retirement age. However, there are situations when you can tap into this money and not get penalized --although tax would most likely be due on the distributions. However, that is a subject for another article.

    Getting the maximum benefit from expense deductibility requires you to keep detailed records/receipts of deductible expenses. If your itemized deductions are greater than the standard deduction - you will take the larger of the two. Expenses such as: mortgage interest, property taxes, charitable contributions, personal property taxes, tax preparation fees, un-reimbursed job related expenses and investment expenses are all accounted for in the itemized deduction calculation. This also directly reduces the taxable income figure on your tax return - and lowers your tax bill. There are also certain tax credits that will also help reduce your tax if they are applicable to your situation. A few that come to mind are: the earned income credit, education related tax credits, the adoption tax credit, the credit for children, and others.

    A CPA can help you figure out what your tax bill will look like at year end by reviewing your income and deduction assumptions. To be most effective - tax planning analysis and strategies need to be considered as early in the year as possible. For 2009, the IRS would expect you to make estimated tax payments throughout the year if you expect your tax bill at the end of the year to be greater than $1,000. For those self-employed people who report their income on Schedule C or who receive K-1's from trusts, partnerships or s corporations, tax planning is a necessity. By working with your CPA on tax planning strategies - you would know if you need to make estimated tax payments or not throughout the year. Getting hit with a big tax bill at tax time is not ideal in any situation.


    Article Source: http://EzineArticles.com/3345758
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