The Importance of Tax Planning

Posted By WealthPLAN || 1-Dec-2014

"Tax planning" is a commonly used term, but it is not well understood. Tax planning is the fine art of arranging your affairs in ways that would postpone or avoid taxes altogether. When you employ effective tax planning strategies, you have more money to save or invest, or both.

In other terms, tax planning means either deferring or avoiding taxes by taking full advantage of the beneficial tax-law provisions, increasing tax deductions and tax credits, and by making good use of all applicable breaks that are available under the Internal Revenue Code.

No one should change their financial behavior for the purpose of avoiding taxes. Effective tax planning strategies permit you to do as you please while reducing your taxes along the way.

Financial planning and tax planning are closely connected due to the fact that taxes are a huge expense as you go through life. If you become very wealthy, taxes will be your single greatest expense over the long run, thus planning to reduce taxes is a critical part of the overall financial planning process.

Unfortunately, a lot of people fail to understand the importance of tax planning until they make a huge mistake and it costs them a fortune in otherwise avoidable taxes. The trick is to plan ahead so you don't learn this lesson the hard way.

There are multiple ways to make expensive tax blunders; for example, selling appreciated securities too soon when holding on for a little longer would have resulted in lower-taxes long-term capital gains.

Other examples include withdrawing from a retirement account before age 59 ½ and getting hit with a 10% premature withdrawal penalty tax, or failing to arrange payments to an ex-spouse so they qualify for deductible alimony.

Common tools used in tax planning:

  • Timing of income, purchases and expenditures
  • Selection of investments and retirement plans
  • Filing status
  • Claiming deductions

The solution is to plan financial transactions with taxes in mind and to avoid making impulsive maneuvers. By seeking the advice of a professional before you pull the trigger on significant transactions, you can save yourself from having to pay otherwise avoidable taxes.

The ultimate goal of tax planning is to accomplish all of the elements of a financial plan in the most tax-efficient manner possible. Tax planning allows a financial plan to be more effective while minimizing tax liability.

To learn more about the advantages of tax planning, contact a San Jose tax planning attorney from WealthPLAN. Attorney Frank Doyle is certified by the State Bar of California Board of Legal Specialization in estate planning, trust & probate law, and taxation law, and is therefore well-qualified to provide you with sound tax planning advice.

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