Tax – a common word dreaded by millions of people around the world. People believe that taxation is boring, complicated, and a bit tricky to handle. Somehow, that presumption is correct.
But you shouldn’t fear taxes at all! Based on numerous studies, many taxpayers were able to minimize their taxes through the application of useful tax planning methods. Sure, there are huge numbers involved, but the solution is imminent.
And so, what is tax planning?
The Basics of Tax Planning
Tax planning is the process of optimizing and reducing your tax liability through various strategies. While you can always pay your taxes automatically, being aware of proper tax planning methods is a better move.
You’re probably aware that your taxes will grow as your income grows. Of course, this can be a good thing because of your higher income. But think about it: what if you can pay a lower tax amount and use the extra money to invest it in something worthwhile, like your business?
Such is the core of the tax planning process. The methodology gives you a whole new set of valuable tax-lowering methods which is beneficial in the long run.
Why is Tax Planning Important?
Responsible tax planning is important because it will create financial leverage for you and your family. If you’re a business owner, then a systemized tax planning process can give you a significant financial boost.
To understand the importance of tax planning, you need to assess these viewpoints:
Tax Liability Management
With proper tax planning, you’ll be able to control your tax liability in an efficient way. It’s normal for business owners to become surprised when they realized how much they can save with a tax planning method.
By knowing your tax situation, you can choose when to apply tax strategies, credits, deductions, and possible rebates. The result is even better if you can work with a talented tax professional.
Do you want to secure a large investment option but can’t proceed because of your tax obligations? In that case, you should work with a skilled tax planning professional. Relay your investment goals and ideas with your trusted CPA so that he or she will know how to proceed.
Taxation is an entirely different world full of complexities, huge numbers, and pitched legal battles. If you’re not careful with your taxes, you might face penalties and legal implications. The statement is even truer if you own a business.
So, it’s safe to say that tax planning is your initial defense against tax-related litigation claims. The process will streamline your tax situation and keep it aligned to basic taxation laws.
There are many factors related to a person’s financial stability. Some of these factors are cash windfalls, estate hand-outs, spending habits, investment portfolios, and economic changes. Perhaps one of the most important factors is tax liability.
Once your taxes are in order, you’ll be a step closer to financial stability. Combine this with other valuable financial strategies, and you will encounter less problems down the road.
General Tax Awareness
An efficient tax planning system will lead to better tax awareness. Once you understand your tax situation, you will know how to make financial adjustments effectively. Plus, you can even have peace of mind.
Now that you know about the importance of tax planning, it’s time to explain the common tax management strategies used by professionals.
A Breakdown of Tax Planning Strategies
There’s no shortage of educated approaches when it comes to taxation. Over the years, CPAs have acquired useful tax management strategies which helped many taxpayers in the U.S.
Check out some tax planning strategies that you should know about:
- Short-Range Tax Planning
Done every year, the short-range tax planning method is aligned with the client’s objectives and goals. The results are outlined properly – as well as year-end expectations and adjustments.
If you’re keen on getting tax advantages within the year, this system will work for you.
- Long-Range Tax Planning
Sometimes, a great plan needs a longer period of time. Under the long-range tax planning system, any adjustment made this year will take effect next year.
If your financial wiggle room is large enough, the long-range tax planning strategy is advisable.
- Estate & Gift Planning
Do you have a high net worth and a collection of high-value properties or assets? If so, your tax obligations can make you wince. The solution is to adopt a modified estate & gift planning system.
According to taxation experts, the estate tax exemption for married couples can reach as high as $22.8 million. This is a great leeway – at least until 2025. If you coordinate with a CPA properly, you’ll have the option to gift your appreciating assets to your heirs without paying federal estate taxes.
- Accounting Method Changes
Under the Tax Cuts and Jobs Act (TCJA), you now have the chance to qualify for cash-basis accounting. This specific change requires a basic move on your part, such as filing a Form 3115. You can also coordinate with a CPA to help you with the accounting method shift.
It’s important to know that the accounting method of your business can increase or decrease your upcoming tax payments. For example: once your business grows, the accrual accounting method is a better option because you get to measure business profitability. In turn, higher profits can lead to higher taxes.
- Purposive Tax Planning
If you’re determined to tax-optimize your life, you will love the purposive tax planning system. With this method, you’d be able to secure the maximum benefits allowable in your bracket through the right selection of business activities, assets, and income. Entrepreneurs and startup owners prefer this system because of its inherent usefulness.
- Tax Withholding Adjustment
Recently, many changes were introduced regarding withheld tax. For singles, the amount withheld is now $12,200. For married couples filing jointly, the amount is up to $24,400.
Once you’ve started working with a CPA, you can assess your withheld tax situation. This is helpful in cutting losses and maximizing your tax benefits.
- Entity Switch Planning
Are you planning to switch your business entity to a new type? Then, in that case, you should apply a strict entity planning system. All business entities have different tax regulations, and they are calculated progressively.
Before switching to a different business entity, always review your business goals and compare them against your tax goals. A CPA can provide the necessary oversight – in case you’ve missed an important tax detail regarding your chosen business entity.
- FSA Maximization
A Flexible Spending Account or FSA is a slightly modified account that you can use for out-of-pocket health care expenses. While the FSA contribution limit is lower, issuers can forfeit unused benefits at the end of the year.
The best way to maximize FSA? Use it before the maturity
- Strategic Relocation
While not a direct tax-based strategy, relocation to a tax-friendly state can yield many benefits. Based on gathered professional data, some of the most tax-friendly states are Wyoming, South Dakota, North Dakota, Alaska, Nevada, Delaware, and Arizona.
Before relocating, however, you must gauge your priorities. Will it lower your taxes but dampen your income potential? Is your family supportive with the relocation plan? These are the questions that must be answered first.
The Qualities Of A Highly Responsible & Trustworthy CPA
Before relying on the services of a CPA, you need to have a checklist of qualities or strong traits. You can’t just pick any CPA right off the bat. By pinpointing the best qualities of a responsible CPA, you’ll have an easier time searching for one.
Below are the important qualities of a responsible CPA:
Integrity is one of the pillars of a successful life. For a CPA, professional integrity means everything.
Since accounting is a trade measured through integrity, a CPA must possess a strong degree of moral principles. You mustn’t hire a CPA who can’t be honest with you and your company. This sound easy in theory, but measuring integrity is different in practice.
To partner up with a CPA who has great moral principles, you need to check his or her accomplishments. Next, you must assess the CPA’s professional experience. And lastly, always consider if the CPA is supported by a reliable accounting firm.
This brings us to our next important quality…
Accountability is the ‘power word’ behind Accounting. If your business needs an accounting service, then you probably want to increase its level of accountability through different strategies. A CPA can definitely help you with this goal.
What makes a CPA accountable? A CPA with a strong sense of accountability knows the level of responsibilities connected to his or her profession. This CPA knows how to own up to mistakes, and he/she must learn not to commit the same mistakes again.
But accountability is not just related to mistakes. It’s all about strengthening a CPA’s desire to go beyond your expectations.
So, always look for a CPA with a sense of accountability. You will never be disappointed.
A small business will keep on changing – for the better or worse. With the help of a CPA, your business will fare on the ‘better side.’
The next trait that you should put in your list is adaptability. If the CPA can adapt to the changes in your business, he/she can be instrumental to your success. An adaptable CPA knows the best strategies to apply for many given situations.
To measure a CPA’s adaptability right from the start, come up with a theoretical business situation. Observe how the CPA provides the solution to the problem. From there, you can assess the thinking process of the CPA.
High Sense of Discipline
Another barometer of success is discipline. You probably know that a person without discipline can reach almost nothing in life. The same thing can be said for a CPA.
A highly disciplined CPA will become a pillar for your business. He or she will meet daily goals on time, and there will be no issues regarding tardiness. Also, a disciplined CPA will notify you regarding any changes or problems.
A disorganized CPA is a real train wreck. If you are partnered with one, then there’ll be chaos ahead. As you know, accounting is full of numbers and meticulous details and one missed item can affect your business.
You must look for a CPA who’s highly organized. It’s very likely that a CPA has learned organizational tricks in the past. But if not, then you can test this relaying another theoretical situation with many details to be fixed.
Almost similar to organizational skills, keenness to detail is another strong factor. Organizational skill is all about the ‘nature’ of the CPA, while keenness to detail is about the CPA’s process.
There are many instances when small businesses were saved by a CPA’s remarkable attention to detail. An undocumented tax entry, for example, must be spotted before the IRS barges in for an audit. Only a detail-oriented CPA can do this – ever.
Continuous Desire to Learn
The accounting field will continue to change, along with every known industry. Therefore, a knowledge-hungry CPA can drive your business forward by implementing new techniques and strategies.
Always look for a CPA who’s determined to improve his/her skills. Perhaps you can even learn new accounting concepts from such a determined CPA!
A CPA with great communication skills can work wonders for your business. Openness is a dynamic quality that can be measured internally (within your business) and externally (outside your business). Just imagine the ideas that a CPA with excellent communication skills can bring.
With a CPA who can communicate effectively, your business will be set towards enduring growth.
Tax planning is never easy. If it was, then many people wouldn’t need to worry about tax issues and looming penalties. Thankfully, CPAs are always here to help!
So, in the face of an impending tax crisis, do not panic. Rather, contact us today so one of our skilled CPAs can help you!