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What is Tax Planning?

  Sanjiv Gupta CPA  Published 
What is Tax Planning?

What is "tax planning?"

Tax planning is the process of identifying tax reduction strategies. Tax advisors analyze a client's personal factors and financial activities to select legal methods for reducing taxable income. The goal of tax planning is to reduce a taxpayer's total amount of taxes payable.

This essentially involves a proactive approach in helping taxpayers deal with their present tax liabilities. This would typically entail factors such as current tax rates, inflation rate and future investment projections. There is a wide array of tax planning strategies that can be employed, but the overall aim would always be to reduce taxes payable by individuals and corporations.

Tax planning is an ongoing process - one cannot plan for a single year's taxes or even a single year's income. Tax planning is long term in nature and requires regular monitoring of an individual's or corporation's tax profile based on their incomes, expenses, age, etc.

Sanjiv Gupta CPA provides users with access to a number of different videos, webinars, live seminars to provide FREE information about taxes in general. However, we strongly recommend speaking to your Certified Public Accountant (CPA) about overall tax analysis to determine the right course of action for you.

What are tax planning strategies for high income earners?

Most tax planning is done with respect to high income earners. There are a number of strategies that can be employed, but it generally comes down to reducing the overall amount of taxes payable and ensuring there is no more than one taxation point at the highest marginal tax rate.

One such example would be setting up a S or C Corporation instead of working on 1099.  Individual tax filers should also consider home office deduction, travel expenses, meal deduction etc.

Another example involves using flow-through shares which defer some tax liability for new businesses trying to get on their feet. The CPA can help you decide if either of these strategies are right for you.

Set up an appointment with Sanjiv Gupta CPA to discuss what options you might have available to reduce your taxable income especially if you are making $250,000 or more.

What is your overall tax rate?

An individual's overall income tax liability is calculated as an aggregate of all different types of taxes payable including: personal income taxes, corporate income taxes and capital gains taxes to name a few. These rates will vary depending on the type of taxation entity (i.e. personal  versus corporation versus trust) and various factors such as taxable income, province of residence, marital status etc.

Having said that, most tax planning is geared towards reducing personal income taxes for individuals. Federal tax rates are set at marginal levels which range from 15% to 33% in the current year. State Tax rates vary depending on the type of filing entity and your home state.

Are you ready to reduce your taxes?   Ask yourself these questions:

  • Do I have a good understanding of my income and expenses?
  • Am I prepared for tax planning both now and into the future?
  • How much do I owe in taxes at present and what is my overall rate after deductions?
  • Am I spending tax-free or tax-deferred funds?
  • Do I have any taxable capital gains to report?
  • Who can help me reduce my taxes?

Most tax planning is done by Certified Public Accountants (CPA). These professionals are well versed in various strategies that will reduce an individual's overall income tax liability. Aside from the CPA, we strongly recommend speaking to your other service providers such as your accountant, financial adviser and insurance broker. These professionals can also help you navigate tax deductions that could save money for you and offset investment income at the same time.

How to save tax on investment income?

To begin with, you do not have to pay tax on investment income. Hence, an individual may find it beneficial to hold assets in a corporation if the capital gain is anticipated to be high. This way, there will only be one level of taxes payable instead of two levels.

Please note that there are restrictions to the amount of capital gains you can shelter . Be sure to speak to your CPA for details!

What is the difference between a trust and corporation?

Trusts are used primarily in estate planning purposes. They are governed by federal tax laws under Federal law. 

Corporations, on the other hand, are entities that protect the owner's personal assets from business liabilities. The corporation pays income taxes while the shareholders receive dividends which can be subject to a withholding tax.

Lastly, we want to remind you that C corporations and other flow-through shares should be filed by April 15th of each year.