Tax planning and projections

Tax Planning

Let’s face it — no one likes paying taxes. The key is how best to do this correctly and legally.   It’s not a matter of not getting caught!   Its a matter of having the requisite knowledge to know what strategies are available and how to best take advantage of these opportunities!

The goal of tax planning is to help you arrange your financial affairs so as to minimize or avoid taxes.   For small business owners, tax planning must generally be applied at both the individual and business level to minimize your income taxes and maximize your tax savings.

There are three basic ways to reduce your taxes.  You can reduce your income, increase your tax deductions, and take advantage of tax credits or other economic incentives available to you.

Reducing Taxable Income

Reducing taxable income can be best categorized into permanent and timing differences.  Permanent differences are when income is reduced and never subject to income taxes.  Timing differences are when the taxes paid are deferred or delayed to a later period.

For individuals, the most common method of reducing taxable income is to increase Individual Retirement Account (IRA) or pension contributions.  For businesses, the more common methods of reducing taxable income is to increase or escalate spending.

Increasing your Tax Deductions

Numerous economic incentives to stimulate specific economic spending are provided through income tax deductions.  These deductions have the effect of reducing your taxable income.  For individuals, the most common tax deductions include the payment of mortgage interest, real estate taxes, charitable contributions, etc.  For businesses, the most common tax deductions include spending, capital improvements, etc.

Tax Credits

Tax credits are specific economic incentives to provide tax relief to targeted business and individuals.  Tax credits are generally permanent reductions of income taxes. For individuals, the most common credits currently available include credits for families with children, education, adoption and certain home improvements.  For small businesses, the most common credits include specific spending for capital improvements, employment, etc.

What Can You Do?

The key to develop successful tax plans is to either meet regularly with your tax advisor, or at a minimum, meet with your tax advisor before year-end to consider and implement recommended tax planning strategies.

Tax Projections and Year-End Tax Planning Strategies

Tax projections are probably the most common tool used by tax planners in projecting taxable income using historical data, projected income and expenses.  The purpose of tax projections are:

  • to determine the necessary cash outlays required before year-end;
  • to avoid underpayment penalties;
  • to project future cash outlays required to meet tax obligations;
  • to compare and contrast various tax savings alternatives;
  • to compare and contrast various tax deferral alternatives;
  • to consider the impact of pending tax legislation

Most tax projections and planning analyses can be prepared for a fraction of your tax savings and can often save you thousands!