How to Strategize Tax Reduction Plans
How to Strategize Tax Reduction Plans
The logic of tax planning:
A tax plan becomes a compelling necessity from the moment an individual or company starts earning taxable income. Tax advisors have always concentrated on devising strategies to enable the rich taxpayers to reduce their tax liability and increase their profitability. Now they have begun to realize that they can use similar strategies to help the smaller taxpayers also to reduce their taxes and save more money. Previously, this exercise for tax reduction would begin during the last few months of the business year, just before the due date for payment. But lately, the realization has dawned that the tax reduction exercise be made into a year-round activity for greater savings to the individual or company concerned.
The strategy of tax planning:
The income scenarios vary from individual to individual and from company to company, so there cannot be a common strategy that fits all of them. Each entity will have to devise and formulate a strategy depending upon the prevailing circumstances.
The major objective of a tax plan is to reduce the outgo of money from you to the government in the form of taxes and to retain more of it in your own pocket. What generally happens is that you over-estimate the tax amounts and pay out more to the government's coffers. After working out the exact tax liability, the IRS routinely returns the excess amount to you in the form of a refund. The government does not pay any interest for the period the excess amount was available with them and utilized for their purposes. By strategic planning, it is possible to reduce the amounts you pay as tax every year and retain more of your income in your own hands. This will improve your cash flow and make more money available to you round the year for saving and for other expenses like investment, paying off your debts or for spending on the pleasures of life.
Understanding income tax:
Among all the laws of the land, income tax laws are the most complicated and even Albert Einstein has been quoted as saying, "The hardest thing in the world to understand is the income tax." You can imagine the plight of ordinary mortals like you and me! So for developing a proper tax plan, you should get the advice of a qualified professional who specializes in this kind of work. Only an expert will have the necessary knowledge and background to formulate an appropriate tax plan to specifically suit your circumstances and financial goals.
You should always bear in mind that tax planning is by no means tax cheating or tax avoidance. It is not meant to take advantage of any loopholes in the tax codes. The objective of tax planning is basically to get tax reduction by legal and legitimate means that are available in the existing tax codes. These are permissible deductions which have the approval of the IRS.
The modus operandi:
Generally there are two principles involved in any tax reduction exercise:
Make your day-to-day expenses tax deductible as you spend it
Take full advantage of the power of retirement plans and investment tax shelters.
As mentioned already, it needs an expert tax advisor to guide you on the correct methods so that you can achieve substantial tax reductions.
You should also make tax planning a continuous activity and ensure that any action or financial decision you take will automatically and legitimately qualify for tax deductions.
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