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What Is Involved in Income Tax Planning?

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  • Written By: Kristie Lorette
  • Edited By: O. Wallace
  • Last Modified Date: 29 August 2016
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Income tax planning are the strategies that an individual or business devises to minimize tax payments. It involves devising and putting a plan in place on minimizing tax payments. The other part involved in income tax planning is tax management, which is essentially, the implementation of the income tax planning strategies.

There are two primary strategies involved with income tax planning. The first strategy is to minimize the income tax liability of the individual or the business. The second primary strategy is to plan out and fulfill financial goals without increasing the tax liability of the people or business involved in the income tax planning process.

In order to reach the goals set in the income tax planning strategies, there are three primary steps that individuals and businesses have to take. The first step is to plan the strategy so that the individual or business pays the least amount of taxes on the transaction as possible.

For example, in determining which retirement savings account is the best one for the individual or the employees of the company, the personal financial situation of each person should be considered. An individual retirement plan (IRA) may meet the financial goals of some individuals, but it may take a Roth IRA to meet the goals of other types of individuals. Part of income tax planning is determining which types of actions, accounts and transactions provide the best tax outcome.

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Income tax planning not only involves reducing the tax liability on income, but it also requires the individual or the business to defer income. When the individual determines the best ways to defer income, they are also figuring out the best ways to defer the tax liability of their actions as well. For example, a financial advisor may tell an individual to take a capital gain by selling an investment to use as this as a tax advantage in a particular year.

Finally, tax planning involves determining the deductions that are permitted under the law. Individuals and businesses should look for ways to maximize the tax deductions they can take. Individuals and businesses should also look for the maximum number of ways possible to take deductions. The more legal deductions an individual or business can take, the lower the taxable income is and the lower the tax obligation is, which is the ultimate goal of income tax planning.

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