Taxes are one of life’s certainties, and no one likes giving up their hard-earned cash.
The purpose of financial tax management is to identify strategies and techniques to optimize short and midterm cash flows, assets, and liabilities. The components of comprehensive financial planning cannot be dealt with in isolation from the other components.
The Key Basis For Tax Planning
The principles of tax planning form an integral part of any wealth-building strategy. The overall objective is to structure your affairs to legally minimize the amount of tax you must pay. You can accomplish this by adhering to what we call the 4D’s of taxation:
- Deduct – maximize all tax deductions and credits.
- Defer – defer paying tax if possible. A tax dollar deferred is often a dollar saved.
- Diminish – position investments in investment vehicles, which attract the least amount of tax, having full regard for your risk tolerance and asset allocation strategy.
- Divide – split income among family members to the maximum degree possible while considering other personal objectives.
When building a tax strategy, the result is usually paying less in taxes or receiving a larger refund at the end of the year. While paying taxes is inevitable, there are several ways to diminish your tax burden and end each year with more money. Proper tax planning makes it easier to build your personal finances and afford the things you want.
Additionally, by anticipating taxes when you create a financial plan, it’s possible to significantly boost how much money you will have in retirement. Many elements of tax planning are quite simple, but it’s always worth speaking with a professional who can offer additional guidance on how to successfully work within the tax system.
A Tool For Retirement
Saving for retirement is difficult under any circumstances, and it can be even harder to set money aside after taxes. Luckily, many retirement savings options allow you to set money aside without paying taxes on that income. Once that money has been placed in a separate account, it can gain value based on interest or investments. You will not be charged taxes on that money until you remove it from the retirement account. By that time, it’s likely you’ll be in a lower tax bracket and need to pay significantly less.
While these accounts do not let you exempt yourself from taxes entirely, deferring payment allows you to maximize your savings and minimize the amount of taxes that eventually need to be paid.
Take a Long-Term Approach
Tax planning offers short and long-term benefits, but you’ll want to take a long view of your financial situation to maximize savings. If you anticipate an increase or decline in your income during the next few years, start catering your financial plan to the upcoming shifts ahead of time. Figure out if it’s best to pay taxes on that increased income right now, or if you should try and put it all into tax-deferred accounts that may incur taxes later.
Consider Every Part of Your Financial Life
Taxes affect so many parts of your life that you may forget different ways to save. If you fail to consider the tax implications of a big financial decision, you could end up wasting a lot of money. The tax laws and expenses surrounding home sales and purchases can be particularly painful for uninformed buyers and sellers.
This can result in massive savings for couples, but far too many people fail to consider this factor when they plan. By speaking with a financial professional before making any financial action, you can prevent yourself from accidentally missing out on significant tax exemptions.