What is Tax Planning and why would you need that?
Welcome to Tax Planning 101 !!!
As we all know, January 1st through April 15th, we must file our income tax forms. This is the time that some of us are taken by surprise when we see the results of the tax return. In my opinion everybody needs tax planning, and I am going to explain to you in a simple way what that means.
As the web defines it, tax planning sounds like a very sophisticated process. We all know that the word “tax” represents an amount of money that we are due, from our income, based on our current circumstances. We can say that the income tax is a percentage of the taxable income, and this percentage is different from person to person and from case to case. On the other hand, the word “planning” represents the process to decide in detail on how to achieve a certain goal and the strategy and path in achieving that. Adding one and one together, “tax planning” should be the process of creating a strategy on how achieve the most desirable result.
It also caters in avoiding unpleasant surprises at “tax “time.
In other words, tax planning, which can be tailored by your tax advisor, is an “What If” scenario in which the tax liability for the financial things that are expected to take place over the current year, or any other year, is calculated, and one need’s to plan for.
The other day, I had a client at the tax office, and after we completed the tax interview, she said to me: “My financial advisor and myself have a question for you, if you are able to enlighten us: What happens if I will take $10,000 out of my retirement plan this year knowing that all the other income, generated by my investments would the same amount?” Yes!!! Just like that. I love these types of questions.
This is a part of my service, and I gladly offer it to all my clients. My answer to that question was: “Not only will I explain to you what happens if you do that, but I will also give you a second scenario …if for example you take out $20,000 and travel the world 😁 …you should be aware of the tax implications.”
You might think of me as a palm reader or a future teller but I am none of those. However, as a tax advisor, I can calculate with very good accuracy an “What If” scenario for the tax implications of any events that would take place in the current year. This is tax planning translated in a simple way. By “tax planning”, you will have the ability to foresee the results of financial events from tax point of view.
Tax planning can be either an easy process or a complex process. It can be done for a short period of time or long term, in order to reach the goals you want to achieve. Tax planning has different aspects, but here, I am just going to mention simple ideas, easy to understand, about this process.
For example, your W4 form. You probably know by now, that when you get hired by your new employer, you are given a form called W4. Don’t panic!!! This form is only an informational form for your employer, so the payroll department knows how many taxes to withheld, based on your current circumstances. This form can also be modified as many times as needed during the year if your circumstances changes. The tax system is perfected in such manner that if the form is accurately understood and completed, everything should be good. Not understanding or filling the form properly will result in less desirable outcomes. This is the time when your tax advisor and the “tax planning” comes in.
The target of the income tax calculation is to be as close as possible to the zero-horizontal line, that is: not to owe money and not to receive any. For many people, due to the latest changes on the payroll forms (W4), getting the desired results was a surprise in the last years.
Here is another example: You are self-employed. You either have your own business, or you are a subcontractor for a company. In this case, you are not having a W4 form to fill out. You will have to figure out your profit first. After that, you will have an estimated tax worksheet to fill out and send estimated taxes during the year. Imagine how much you could benefit from the “tax planning”. No bad news at tax time!
Over the years, as much as we like surprises, I learned that the only one surprise everyone hates is a “Balance Due” surprise on the tax return. Especially when… it is unexpected.
That being said, what I want you to remember from this blog is: YOU have the option and the choice of calculating in advance how much tax you are going to owe, based on your income level and current circumstances, and by doing this , you are doing “tax planning”. Don’t let yourself unprepared!!
These things can be planned, and the plan is best with the help of you tax advisor. I am not saying that you can’t do this on your own, but a tax advisor should be mastering the tax planning.
I am recommending that if you don’t have the knowledge to do this on your own, please feel free to ask the help of a tax advisor. A tax advisor has more capabilities than just preparing the taxes. A tax advisor it’s a specialist in the taxation process. Ask for help and avoid negative surprises!
Today was about how to avoid undesired surprises in the income tax world. I will be back soon talking about other aspects of the tax planning, more insights to come on how one can save on taxes by doing the tax planning in the long run.
Meantime, feel free to send us any questions or comments about this subject. You can email us at any time with inquiries or to set up a meeting at contact@theoffice.online
Happy Tax Planning!!! 😁 And don’t let tax season stress you out… Call now The Office at (817) 901-2323 to schedule your free consultation at and let them handle the heavy lifting.
Your Tax Advisor