The goal of all tax planning strategies is to minimize an individual’s or business’ total tax liability for the year while also meeting personal or business financial goals. In order to achieve these goals, comprehensive research and exacting record keeping are essential elements of all types of successful planning strategies. An individual may not need to use every type of tax strategy, but having a broad knowledge of tax issues will assure that he minimizes his tax liability and prepares an accurate return. Whether it is taking advantage of current education-related tax credits or understanding the intricacies of depreciation, each strategy relies on thorough research and meticulous recordkeeping.
Investigating all aspects of income taxes — concentrating on the areas that pertain to the individual’s financial situation — is the most important tax planning strategy. Many credits, deductions and limits on retirement or health savings accounts contributions change from year to year. Taxpayers often remain unaware of these changes and miss opportunities that they would qualify for. The most accurate and updated information can be accessed through the federal, state or local tax entity. For citizens of the United States, the Internal Revenue Service (IRS) offers an extensive collection of publications covering every area of individual and business taxes.
Whether using a tax professional, accountant, or self-preparing the return, implementing tax planning strategies and maintaining records throughout the year provides the individual or business with the necessary tools to minimize tax liability. This second important tax planning strategy allows the individual or business to accurately track their progress on their goals through precise record keeping. It also assures nothing is missed when it is time to prepare the tax return. Spreadsheets and financial software are tax-planning tools that help organize information. The software expense may be tax deductible.
Although the first two tax planning strategies apply to everyone, others are applicable depending on the individual’s financial situation. Making sure that pre-tax contributions to retirement and health savings accounts are maximized and done within the allowed time span may help lower any tax liability. Homeowners should use strategies that take advantage of any credits available for expenses relted to their residences. For example, property taxes and interest on mortgages are usually deductible expenses. Special tax credits may be temporarily available for improvements that increase the energy efficiency of the home, so taking advantage of these can also reduce tax liability.
College students, their families and anyone taking coursework should be aware of changes to the credits and deductions available for education-related expenses. The treatment of investment income and losses may change, too, so individuals might make advantageous adjustments based on current rules. Other tax planning strategies involve medical expenses, charitable contributions and adjustments to tax withholding amounts. Many people are unaware that deductions can be taken up to the amount of any earnings related to a hobby. In the same manner, gambling losses can be deducted up to the amount of gambling winnings.