Tax Planning

Tax planning refers to the analysis of a financial situation with the purpose of reducing tax liability. The tax plan ensures that all elements of the financial plan work together to minimize tax contributions. Through tax planning, individuals ensure they can attain maximum tax capability. Reducing tax liability increases the ability to make contributions to retirement plans and add additional savings which are vital for financial and retirement success. Tax planning consists of various considerations such as taxable income, filing status, adjustments and exemptions, tax deductions and tax credits, and lastly major purchases and investments. Tax planning is crucial for businesses and individuals to help achieve financial goals and objectives.

The main objectives of tax planning

The main objective of tax planning is to reduce one’s tax liability. Authorities, like the IRS, implement legal measures and regulations to ensure citizens pay the required tax amount. Effective tax planning helps individuals and businesses save more money while adhering to legal and regulatory requirements. Tax planning is the foundation of effective financial planning. It ensures that savings from taxes are generated according to the legal obligations required by the government. Business owners ensure that finances saved from taxable sources are redirected towards income-generating plans. Tax planning also ensures that businesses take appropriate precautions to avoid future litigation or audits.

Importance of tax planning

Tax planning plays a key role in outpacing the cost of living and inflation while maximizing returns. When assessing investment value, inflation, expenses, and tax are all taken into account. The tax burden on properties can have huge impacts on one’s overall portfolio With investments, individuals should ensure the portfolio is well-diversified and designed to suit their needs and goals. Without effective tax planning, returns are likely to be diminished by taxes.

Reduced tax bills

Paying low taxes reduces the expenses incurred by an individual or a business when paying expenses. Working towards tax efficiency is the best way to hold together assets and capital. Capital gains tax and income tax can both be reduced with effective tax planning. Reviewing one’s tax plan can reduce the impact tax expenses may have on one’s financial situation.

Flexibility in tax payment

Proper tax planning provides individuals and businesses with a more flexible approach to paying taxes. Flexibility in tax payment reduces the impact on personal or company finances allowing individuals and businesses to gain full control of their finances. As a result, preventing the pressure of paying more taxes than income. Gaining control of all payment arrangements makes it easier to budget one’s finances and achieve sustainability.

Advantages of tax planning

To get a head start

For businesses operating under a trust, tax planning can create an estimate of trust distribution, saving the need to make rash decisions. Businesses are able to look at the available options and strategize according to analyzed data. Starting tax planning earlier allows the business to attempt more strategies to maximize tax savings.

To minimize litigation

Tax evasion and avoidance can occur due to high taxes. Tax planning helps in resolving possible tax disputes with federal, state, and local authorities. This can save individuals and business entities from legal liabilities.

To see the bigger picture

Tax planning allows individuals and businesses to get an insight into their current financial situation. Individuals can assess whether the business structure needs a change and get a sense of potential profits and revenue from alternative opportunities. If a change is needed to be made, tax planning can help determine the best course of action.

To ensure economic stability

Effective tax planning provides a healthy flow of money that contributes to economic progress. Individual and business tax planning creates more money available for personal use and prevents the risk of bankruptcy that may result from difficulties in bills and loan payments. A stable economy benefits both the citizens and the country.

Types of tax planning

Purposive tax planning

Purposive Tax planning involves using tax-saving instruments with the specific purpose of getting the maximum tax benefit by making correct investment selections, suitable replacements of assets, and diversifying income and business activities.

Short-range tax planning

Tax planning is conducted and implemented at the end of the fiscal year. Individuals and entities looking to invest resort to short-range tax planning and search for ways to limit tax liability at the end of every financial year. Although this method does not involve long-term commitments, it promotes substantial savings.

Long-range tax planning

Under this method, the planning is conducted at the beginning of the year, and taxpayers follow the plan until the end of the year. This type of planning does not offer immediate tax benefits, but it is beneficial in the long run.

How can Arrowroot Family Office help you with your tax planning?

Arrowroot Family Office was created to bring a solution to the complex financial and investment lives of many families. Arrowroot Family Office helps in tax planning by incorporating the asset class features during portfolio optimization. Arrowroot Family identifies the most effective approach to a client’s portfolio according to each individual portfolio and profile.. Arrowroot Family seeks to eliminate these differences when evaluating after-tax returns to ensure effective tax planning. Arrowroot Family Office prioritizes equity allocation to achieve tax efficiency. The organization favors tax-efficient techniques by maintaining minimal tracking error and improving on losses. Therefore, Arrowroot Family Office specializes in helping clients meet their financial goals and retain as much income as possible through effective tax planning.

Helping you achieve your evolving financial objectives

Frequently asked questions

Tax planning is a legal and ethical method of keeping taxes at the minimum level. However, strategies applied in tax panning can be termed illegal if they do not adhere to legislation. The strategies should be based on legislation and judicial rulings on tax exemptions, debate, relief, and deductions.
Tax planning fees on the year of payment are considered miscellaneous itemized deductions and cannot be deducted from the taxpayer. The tax planning fees include the cost of electronic filing of returns, tax publications, and software programs for tax planning.
The law allows taxpayers to arrange their finances in a cost-effective way to reduce tax obligations. Tax planning is legal because it involves organizing financial conduct in an efficient way.
High taxes can affect the annual income leading to financial instability. To avoid this, tax planning is considered the most effective way of reducing tax liabilities. Tax planning is effective because it uses benefits and exemptions provided by the law to minimize tax bills.
Tax planning strategies refer to the ways in which individuals and businesses use to defer current tax liability to the future, thereby freeing up more funds for personal use or investment. Tax planning strategies are centered on increasing income, reducing deductions, and lower tax rates.
Tax evasion is the deliberate act of an individual or entity to avoid paying taxes, while tax planning is the financial analysis to ensure a person or an entity pays the lowest taxes possible. The main difference between tax evasion and tax planning is legality. While tax planning is allowed by the law, tax evasion is completely illegal.
The average cost of tax planning by hiring a professional tax ranges between $146 and $457. However, it can be cheaper if a person decides to purchase the accounting software and perform the panning for themselves.
Individuals and business owners need tax planning to reduce tax liability and increase savings and productivity.
Tax planning is provided by CPA specialists and accounting firms with experience in tax law and finance. The CPA specialist of accounting firms should ensure that the tax reporting and planning complies with the state and national tax law. However, individual taxpayers can use attorneys, agents, and tax preparers for personal tax planning.
Tax planning is necessary to build personal finances and save more cash for investment. It also helps to minimize the income tax payable every financial year, thereby boosting the savings available during retirement. Proper tax planning helps businesses achieve their financial goals by maximizing deductions and gaining greater control of taxes.