What is Tax Planning?

Roy Y. Gagaza

April 25, 2023

Tax planning analyzes and arranges one’s financial situation to maximize tax breaks and minimize tax liabilities legally and efficiently. A plan that minimizes your tax burden can help you save money and earn a larger refund at the end of the year. This is why it’s so important to take your time to learn the ins and outs of the IRS tax code.

Tax evasion and avoidance

Tax planning is a legal way to reduce tax liability using deductions, credit claims, investments, and other strategies. These strategies help to decrease the payable tax amount, but citizens should refrain from engaging in this process as it may increase the burden on the economy as a whole.

In the United States, about one out of every six dollars owed in federal taxes must be paid. This represents a significant loss to the government.

Sophisticated tax evasion also occurs, which is often missed by random audits. This includes the income of so-called “pass-through businesses,” such as partnerships or corporations that do not remit their tax, and high-income individuals who hide offshore assets.

Some strategies to avoid tax include reducing expenses, contributing to pre-tax retirement accounts, and investing in tax-advantaged accounts such as IRAs or 401(k)s. Taking advantage of health savings plans or deductible healthcare expenses can also reduce your taxable income.

Tax planning for businesses

Tax planning for businesses is an ongoing effort to maximize income and minimize tax liability. It involves a variety of strategies, including utilizing all available tax deductions, appropriately timing expenditures, and investing in employees.

One of the most basic business tax planning strategies is to defer taxable income until future years. For example, a small business that uses the cash-basis accounting method may delay sending invoices until January to capture expenses from December sales.

The ideal time to defer income depends on your business’s current and future outlook. It might also save on taxes to accelerate an expense into the current year.

However, these strategies are challenging to pull off and only suitable for some businesses. It is important to consult with an accountant or tax advisor.

Tax litigation

When a tax dispute arises, you need a lawyer with a special skill set. This includes experience defending against penalties, interest, and even criminal charges for tax debts owed.

“tax litigation” or “tax controversy” refers to resolving a tax dispute between a business, individual, trust, or estate and taxing authority. This can occur as a result of an audit, assessment, or collection activity by the IRS or other taxing authority or as a result of a claim for a refund.

When a tax dispute arises, you should take action as soon as possible. This is especially true if the IRS has notified you of a deficiency or you have received an audit notice.

Tax planning for individuals

Tax planning is a process that helps individuals and businesses reduce their taxes. It also allows taxpayers to avoid tax penalties, keep their financial records organized and plan for the future. Another tax saving strategy is to increase contributions to a 401(k) plan or health savings account. These can be a great way to maximize tax refunds and help save for retirement.

There are many strategies to avoid tax liability, including shifting income from a high-tax bracket to a lower-bracket taxpayer. Shifting income can be as simple as hiring a dependent child, or it may include becoming part-owner of a family business.