What is tax planning?
Get some insight into the tax system and discover the benefits of getting good tax advice.
Summary
Tax planning involves making informed decisions to legally minimize the amount of tax you owe.
Getting good tax advice ensures you stay compliant with the current regulations while benefitting from the most advantageous strategies.
Federal income tax is progressive, ranging between 10% and 37%.
A financial advisor can help you navigate your taxes and develop strategies to reduce your tax burden.
Why is getting good tax advice so important?
Tax planning involves taxpayers using the current regulations to pay minimal taxes.
Individuals or their financial advisors analyze their entire financial situation to understand how much tax they must pay, when it should be paid, and how they can possibly remain in a specific bracket to reduce their tax burden.
Getting tax advice is not mandatory, but it can have massive benefits for:
Those who don’t have the time or understanding to do it themselves
People with complicated tax situations
Those with sizeable assets or charity contributions
Business owners
Individuals planning to itemize their deductions.
People who have experienced significant life changes.
Federal income tax is progressive, meaning that the more you earn, the more tax you should pay. This is done through tax brackets; your tax bracket is based on your taxable income. If you move to another tax bracket, your tax rate will increase or decrease accordingly.
These are the rates for 2024, payable in 2025.
| Tax Rate | Single | Married (joint filing) | Married (separate filing) | Head of household |
|---|---|---|---|---|
| Tax Rate | Single | Married (joint filing) | Married (separate filing) | Head of household |
| 10% | $0 - $11,600 | $0 - $23,200 | $0 - $11,600 | $0 - $16,500 |
| 12% | $11,601-$47,150 | $23,201-$94,300 | $11,601-$47,150 | $16551-$63,100 |
| 22% | $47,151-$100,525 | $94,301-$201,50 | $47,151-$100,525 | $63,101-$100,500 |
| 24% | $105,526-$191,950 | $201,051-$383,900 | $100,526-$191,950 | $100,501-$191,950 |
| 32% | $191,951-$243,725 | $383,901-$487,450 | $191,951-$243,725 | $191,951-$243,700 |
| 35% | $243,726-$609,350 | $487,451-$731,200 | $243,726-$365,600 | $243,701-$609,350 |
| 37% | $609,351 or more | $731,201 or more | $365,601 or more | $609,350 or more |
Seeking tax advice from a professional could benefit clients in various ways:
Tax planning can save clients money.
They understand the current laws and legitimate deductions, making it easier to reduce tax liability.
A tax specialist helps clients avoid penalties.
Their expertise ensures quick and accurate filing.
When do taxes need to be paid?
Taxpayers calculate their taxable income based on a tax year. This year consists of twelve consecutive months, incorporating all records and reports of income and expenses.
You may use either of the following tax years:
Calendar year running from January 1 to December 31
Fiscal year - twelve consecutive months ending on the final day of any month aside from December
For individuals, taxes are typically due on April 15 each year. For those using a fiscal year, taxes need to be paid on the 15th day of the fourth month after the end of the tax year.
Taxpayers have two options when filing their returns. They may post hard copies to the IRS or use tax preparation software for e-filing.
For ease of use, the IRS strongly recommends tax filers to use their electronic system.
What are the different types of taxes?
The USA has different types of taxes that fall into three main categories: income, property, and taxes levied on goods and services.
Income taxes – Individuals pay a percentage of their income to the federal government or state. Federal taxes are mandatory and calculated according to tax brackets. State taxes vary from state to state. Not all states have an income tax; these include Alaska, Florida, Nevada, Tennessee, South Dakota, Washington, Wyoming, Texas and New Hampshire.
Payroll taxes – The government requires employers to deduct payroll taxes from employees’ wages every pay period. It matches the amount deducted for Social Security and Medicare.
Capital gains taxes - These are paid on profits made from the sale of assets, typically homes, stocks, and bonds. How you calculate your capital gains tax depends on how long you owned the asset before selling, your filing status, and your taxable income.
Estate and inheritance taxes - These taxes can get quite high; however, they only apply to some individuals. Everything below $11.7 million for individuals and $23.4 million for married couples is exempt.
Self-employment taxes - These are the same as payroll taxes, covering the individual’s Medicare and Social Security. The rate is 15.3%.
Property taxes – The government imposes taxes on the value of real estate and tangible personal property, such as vehicles, boats, aircraft, and recreational vehicles. These vary from state to state.
Sales tax – The states levy taxes on items purchased as a percentage of the item’s price. Sales tax varies between the states, with some states not imposing it at all. Other taxes include excise taxes and taxes on imported goods.
Tax planning vs tax avoidance: How do they differ?
Personal tax planning involves the analysis of your financial situation to engineer the best plan to pay the least amount of tax possible.
Tax avoidance finds legal loopholes to avoid paying taxes through deductions, exclusions, and credits.
If you’re a business owner, have more than one income source, or do freelance or contract work, tax planning advice is advantageous for completing your self-assessment correctly.
On the other hand, large corporations may practice tax avoidance by deducting employee stock options, utilizing accelerated depreciation, and offshoring company profits.
How does a self-assessment tax return work?
Your self-assessment tax return is the documentation you submit to the IRS or state Department of Revenue declaring your income and expenses for a particular tax year.
You will require the forms and receipts indicating your income earned and tax-deductible expenses for the year. Select your filing status and decide whether you will itemize your deductions.
Once completed, you must submit your forms by the due date via mail or electronically for the IRS to assess your return. You can pay online, by check, or by money order if you owe money.
If you are owed money, receiving it will take approximately six weeks.
How to find a financial advisor
Navigating the tax system demands careful consideration and informed decision-making.
Tax planning, with the guidance of professional advice, is a valuable tool for individuals and businesses to optimize their financial positions while ensuring compliance with the regulations.
If you need online tax advice or assistance with any other financial matters, Unbiased can help.
Working with the right financial advisor for your needs will ensure that you learn more about taxes and meeting your obligations.
Writers
Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.