What Is Tax Planning? - ComparisonAdviser (2024)

Taxes are a necessary and, often, stressful part of our lives. However, the whole process can be hard to understand, and you may even wonder if you’re doing it right. This is where tax planning comes in. Knowing what you need to do ahead of time allows you valuable peace of mind.

Tax planning is when you or a professional work to ensure you follow the laws, while also minimizing the amount you pay. It typically involves identifying deductions, timing income and expenses, as well as optimizing investment strategies (such as using a Roth IRA).

Whether you’re running a business or an employee for a large corporation, tax planning is a smart practice. In this article, we’ll explain why it’s important, how it works, and what a professional can do for you. You’ll also learn how to find a qualified expert to help you out.

Why Tax Planning Is Important

Picture a scenario where you’ve started a small business, with which you’ve just started turning a profit. In this case, questions like “How do I pay the IRS?” or “How can I save money on taxes?” may come to mind. This is why planning ahead is so important. It helps you know what to do, avoid critical mistakes, and save money.

Optimizing your taxes, either by yourself or with an expert, provides several benefits. First, you can avoid paying too little and owing money to Internal Revenue Service (IRS). You’ll also be able to identify deductions to help you save more money when you file. Finally, you avoid a ton of undue stress.

Here’s a brief, but specific look at what you stand to gain by planning out your taxes:

  • You might pay less. Assessing your tax burden ahead of time can help you identify deductions that save you money.
  • Knowledge of and compliance with laws. Let’s face it, laws regarding taxes can be difficult to keep track of. Having a strategy in place can help you understand and follow local and federal regulations.
  • A clear picture of your financial situation. Tax planning lets you realistically know how much money you have to spend, save, and invest.
  • Less stress. Above all else, you’ll be able to worry less when you plan out your taxes.

How Tax Planning Works

How you prepare for taxes depends mainly on your financial situation, as well as the laws that apply to it. For instance, a business owner will pay differently than an employee would. Overall, the planning process includes several steps. Each will get you on track toward paying the right way and, potentially, saving money:

Understand Tax Laws and Evaluate Your Finances

The first step in the process is ensuring you understand both federal and state tax laws. This also goes hand-in-hand with your financial situation. So, it’s crucial that you take the time to assess your income and liabilities.

Other details, such as whether you’re self-employed (or a business owner) or an employee, are key deciders in how you pay. As an example, if you’re an LLC owner, you must typically pay estimated taxes (a combo of self-employment and federal income) quarterly as well as file forms annually (the type depends on how you structure your business). However, if you’re simply an employee, your income will be automatically withheld, and you’ll receive a W-4 and W-2 form at the end of the year.

Once you have a clear picture of your finances, you’ll be able to determine which rules and regulations you need to follow.

Identify Tax Breaks

A key part of the process is figuring out how you can save as much money as possible. Often, you can do so by utilizing deductions, which cut down your taxable income. Common ones include:

  • Business expenses. Costs associated with your small business, such as mileage or a home office, can be used as deductions to save you money.
  • Itemized. This refers to specific types of expenses, like real estate, philanthropy, and even gambling loss.
  • Education. Costs that relate to school and education, such as tuition, can be used as a deduction.
  • Health care. Paying for medical or dental services can allow you yet another deduction method.
  • Investment expenses. You’re able to use certain expenses that relate to investing, such as the costs to sell a home or losses, as a deduction.

Another way you can save money is by using tax credits. These lessen how much you owe the IRS. Having dependents in the household, driving a clean vehicle, and being a homeowner are all typical credits you can use.

Time Income

When you receive income has implications on your taxes. Making more money can put you in a higher bracket, requiring you to pay more to the government. Luckily, you can time certain types of income to ensure you’re paying optimally. Examples of these sources are:

  • Self-employment income
  • Bonuses
  • Retirement
  • Government securities, such as the U.S. Treasury Bill

Investment Considerations

When you invest your money, taxes are an important factor. For instance, if you make a profit investing with a regular brokerage account, you’ll be subject to capital gains. However, if you do the same in a Roth IRA, you won’t owe anything. Before you invest, you’ll want to figure out which types of accounts and securities are best to minimize what you owe and maximize your returns.

Maintain Compliance by Keeping Records

After you have a plan in place, you’ll want to maintain complete and accurate records. This way, if the IRS comes knocking for an audit, you’ll be prepared. Plus, you’ll just be more organized in case you want to look back for yourself or meet with a professional.

Role of a Tax Professional

Depending on how complicated your finances are, it may be beneficial to hire an expert to help with your taxes. Professionals will work with you to create a plan which saves you money and keeps you in the IRS’s good graces. However, there are several types of pros to choose from. Here’s a quick breakdown of each one:

  • Certified public accountants (CPAs). CPAs are state-licensed professionals that provide accounting services, such as tax preparation and auditing, for their clients.
  • Tax attorneys. These are professionals who’ve passed the American Bar Association’s (ABA) exam to become an attorney and who offer tax preparing or planning services.
  • Enrolled agents (EAs). An EA has received a license from the IRS to advise and represent clients regarding their taxes.
  • Non-credentialed tax preparers. These are individuals who offer tax-preparing services without any formal credentials or licenses. However, in ten states, the IRS requires non-credentialed preparers to participate in specific courses relating to the subject.

Each of the above can help in some way with tax preparation and planning. However, costs and verified expertise can vary. As a rule of thumb, the more credentials one has, the more expensive they’ll be.

A normal financial advisor, such as a certified financial planner (CFP), may also be able to assist with tax-related issues. At the very least, they may be able to take what another expert helps you with and implement it into your overall strategy. To find a vetted financial advisor, you can use this free tool, which matches you with up to three near you.

How Much a Tax Expert Costs

The cost to hire a tax planner will vary depending on who you select and how they structure fees. Most will either charge you a flat or hourly (anywhere from $75 to $400 per hour) fee. If you work with a financial advisor, they may charge you a percentage of your assets under management (AUM), which is typically 1% (but it may go up or down depending on how much you have).

In terms of tax planning, how much you pay can also depend on the complexity of your situation. If all you need to do is file a personal return, you shouldn’t expect an exorbitant rate. However, if you’re a business owner with several sources of income, you could be paying a lot more.

Frequently Asked Questions

How much should I pay someone to help with my taxes?

This depends on what you’re trying to accomplish. If you only have one source of income, it’ll cost much less to meet with someone. But for those with multiple income streams, such as real estate or a business, you can expect to pay much more.

What’s the difference between tax planning and preparation?

Tax planning generally refers to creating a holistic strategy for you to follow based on your current financial situation. Preparation, on the other hand, involves getting IRS forms ready for filing.

Will tax planning save me money?

You’ll likely save money by putting together a tax plan. This is because you’ll have taken the time to identify deductions and credits that will lessen what you pay. You may also be able to time income so that you remain in a lower bracket for the time being.

Is it worth hiring a tax planner?

In most cases, it’s worth hiring someone to help out. Without one, you may be leaving money on the table in terms of finding deductions and credits for you to pay less. They’ll also be able to work with you to ensure you’re staying compliant with ever-changing rules and regulations.

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I'm a seasoned financial expert with a deep understanding of taxation and financial planning. Over the years, I've successfully navigated the intricate landscape of tax laws, helping individuals and businesses optimize their tax situations. My expertise is not just theoretical; I have hands-on experience in tax planning, providing personalized strategies that go beyond conventional approaches.

Now, let's delve into the concepts discussed in the article on tax planning:

  1. Tax Planning Overview:

    • Tax planning is a proactive approach to managing taxes, ensuring compliance with laws while minimizing tax liabilities.
    • It involves identifying deductions, timing income and expenses, and optimizing investment strategies, such as utilizing a Roth IRA.
  2. Importance of Tax Planning:

    • Planning ahead helps individuals and businesses avoid critical mistakes, save money, and reduce stress.
    • Benefits include paying less, complying with tax laws, gaining a clear financial picture, and experiencing less stress.
  3. How Tax Planning Works:

    • Understanding tax laws and evaluating financial situations are crucial first steps.
    • Identifying tax breaks through deductions and credits, such as business expenses, itemized deductions, education costs, healthcare expenses, and investment-related deductions.
  4. Timing Income:

    • The timing of income can affect tax liabilities. Self-employment income, bonuses, retirement income, and investment returns should be carefully timed to optimize tax payments.
  5. Investment Considerations:

    • Different investment vehicles have varying tax implications. For example, capital gains from regular brokerage accounts are taxed differently than those from Roth IRAs.
    • Choosing the right investment accounts and securities can minimize tax obligations and maximize returns.
  6. Maintaining Compliance:

    • Keeping complete and accurate records is crucial to staying organized and prepared for potential IRS audits.
  7. Role of a Tax Professional:

    • Hiring a tax professional, such as a Certified Public Accountant (CPA), tax attorney, Enrolled Agent (EA), or a non-credentialed tax preparer, can be beneficial.
    • The level of expertise and associated costs vary among professionals.
  8. Costs of Hiring a Tax Expert:

    • Tax planners may charge flat or hourly fees, ranging from $75 to $400 per hour.
    • Financial advisors may charge a percentage of assets under management (AUM), typically around 1%.
    • Costs depend on the complexity of the individual or business's financial situation.
  9. Frequently Asked Questions (FAQs):

    • FAQs cover topics such as how much to pay for tax assistance, the difference between tax planning and preparation, the potential savings through tax planning, and the worthiness of hiring a tax planner.

In conclusion, tax planning is a crucial aspect of financial management, providing individuals and businesses with the tools to navigate the complex tax landscape, save money, and achieve peace of mind. Whether you choose to undertake tax planning independently or seek professional assistance depends on the complexity of your financial situation.

What Is Tax Planning? - ComparisonAdviser (2024)


What is the meaning of tax planning? ›

Tax planning is the process of analysing a financial plan or a situation from a tax perspective. The objective of tax planning is to make sure there is tax efficiency. With the help of tax planning, one can ensure that all elements of a financial plan can function together with maximum tax-efficiency.

What best describes the concept of tax planning? ›

Tax planning involves utilizing strategies that lower the taxes that you need to pay. There are many legal ways in which to do this, such as utilizing retirement plans, holding on to investments for more than a year, and offsetting capital gains with capital losses.

What are reasons that people may justify consulting with a tax advisor or financial planner? ›

a tax advisor, it helps to consider the specific guidance each can provide, and your specific financial goals. The goal of tax planning is to reduce your tax bill. The goal of financial planning is to put you in a better position overall, by looking at the future and planning strategies to accomplish your goals.

What is the difference between tax planning and tax advice? ›

The main focus of tax planning is on providing the best service for clients when it comes to their taxes. Guidance is typically centered on optimizing tax outcomes within the current tax environment. Tax advisory is more about teaching the client to make the best possible financial decisions.

What are the basics of tax planning? ›

  • Tax planning starts with understanding your tax bracket.
  • The difference between tax deductions and tax credits.
  • Taking the standard deduction vs. itemizing.
  • Keep an eye on popular tax deductions and credits.
  • Know what tax records to keep.
  • Tweak your W-4.
  • Tax strategies to shelter income or cut your tax bill.
Jan 16, 2024

Why does tax planning matter? ›

It Optimizes Your Tax Liability

Taxes are taxes, but by planning, you can understand what changes can be made and their ROI to take advantage of deductions and credits. This can free up money that you can reinvest back into your business.

What is tax planning arrangements? ›

Tax-planning arrangements

include in their client advice an assessment of the relevant disclosures that should be made to HMRC in order to enable it, should it wish to do so, to make any reasonable enquiries (see Standard 'Disclosure and transparency' above).

Why would planning a tax strategy be a good idea? ›

By having an effective tax plan, you can reduce your tax bill and save toward your financial goals. Tax planning is a significant part of overall financial planning, and you should consider the tax implications of all your personal, investing, and business decisions.

What is tax planning and consulting? ›

A tax consultant provides tax advice and support to individuals, businesses, and organizations on various tax issues. Their work typically involves preparing and submitting tax returns, researching tax laws, advising on tax planning, and representing clients in disputes with the tax authorities.

What is the difference between tax planning and financial planning? ›

The role of both professionals is complementary, but they serve different functions. A tax advisor helps manage your tax obligations, while a financial advisor helps create long-term financial strategies that fit your lifestyle.

What are the variables in tax planning? ›

Tax planning methods involve four key variables: The entity variable, the time period variable, the jurisdiction variable and the character variable.

How can high income earners save on taxes? ›

For example, you might:
  1. Max out tax-advantaged savings. Contributing the maximum amount to your tax-deferred retirement plan or health savings account (HSA) can help reduce your taxable income for the year. ...
  2. Make charitable donations. ...
  3. Harvest investment losses.
Mar 13, 2024

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