Tax planning is a process of minimizing the taxes you pay by taking advantage of tax laws. Tax planning is important because it can help you get more money in your pocket and reduce the amount you’ll have to pay later on.
The best time to plan your finances is before the year begins. Here are some things to know about tax planning:
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Taxes are important
Taxes are an important part of our economy. They help keep our roads paved, schools running and police officers patrolling our streets. You might not like paying them, but you should at least understand how they work. Taxes also provide funding for valuable programs like Social Security and Medicare, which help retired people live comfortably and receive health care benefits when they need them most.
Most taxes are unavoidable
You may be able to avoid some forms of taxation, such as sales tax or property tax, but there’s no way around paying federal income tax or state income tax. If you earn an income from working, then you must pay taxes on that income — even if it’s only $600 a month! That’s because income over $9,000 per year is taxed at a rate of 10%. The more money you earn, the higher percentage goes to taxes (20% for incomes above $400,000).
You should set up a separate bank account for savings so that all your savings go into this account only. This way, when it comes time to file income tax returns, it becomes easy for you to segregate your earnings from other sources of income such as interest earned from fixed deposits, etc., Making sure that all your savings go into this one account will also help when it comes time to declare taxes on them too!
A good tax plan considers both immediate and long-term goals. A basic tax plan should include:
Deductions and credits: These are amounts that lower your taxable income. Examples include mortgage interest payments, charitable donations and medical expenses (for those who itemize their deductions).
Retirement savings contributions: Retirement savings programs like IRAs, 401(k)s, 403(b)s and 457 plans offer tax benefits for contributions made by individuals.
Investment diversification: Diversification minimizes risk by spreading investments across different types of assets (stocks, bonds, mutual funds), companies (domestic vs international), industries (technology vs utilities) and sectors (growth vs value).
You can reduce your taxes by making contributions to qualified retirement plans such as an IRA or 401(k). You don’t receive any immediate tax deduction for making these contributions, but they allow you to defer paying taxes until retirement when you’ll likely have a lower overall tax rate than today.
Planning starts early. While some people wait until the last minute before filing their returns, there are certain things you can do throughout the year to make sure you’re in compliance with tax law and paying as little as possible in taxes. You should also make sure all of your documentation is in order so that it doesn’t become an issue when filing time comes around each year. To know more about tax planning you can contact any Local Accountants.