What Does Tax Planning Actually Mean?
To understand the importance of living trust tax planning, you have to understand the meaning of that. It’s easy to misunderstand the real meaning of tax planning, many people mix up this term with not paying taxes illegally, instead of finding a way to avoid paying it according to tax law. So, it could be said that man who makes tax planning strategies actually wants to reduce the tax liability by using all allowed exclusions, rebates, deductions, concessions, etc. To keep it simple, he is looking for a method of how to pay as little tax as possible legally.
Why Is It So Much Important?
The most obvious reason is to pay less tax! You are not even aware how much money you lose on taxes, but if you take care of all your bills and calculate everything precisely, you will see that you can save thousands of dollars on year basis if you take care of your personal or business economy. Another big reason is to avoid litigation incidence. Many tax collectors are hardly waiting to find some irregularity in your papers and send you to court. If you care about you and your company, you don’t want to allow this, so the best way of dealing with it is to make good tax planning strategy.
Also if you take care of tax planning you would be able to anticipate any new changes in tax law and you don’t need to wait last minute to solve all of your problems in this sphere of business.
How Should This Plan Look?
Well, there are some basic instructions and principles for making good tax plan. First of all, it should be said that there are few ways of classification tax plans. Some experts say that there are two types, and other say that there are three types of tax planning.
Those who say there are two types, separate tax plans on ad-hoc and permanent planning. Ad-Hoc plans are intended for specific projects in order to make an exact prediction of all tax liabilities and finding a method of dealing with them. In the other hand, permanent plans are made for long-term organization and systematization in order to take care of all taxes in long run. Very important part this kind of planning is International tax planning because nowadays it’s impossible to imagine big company working only in one country, so for sake of globalization of business making good International tax planning is mandatory.
Other experts have put these two types in one, and they made classification by legality on permissive tax planning and purposive tax planning. Saying it in a simple way, permissive tax planning implies all allowed methods of avoiding taxes, and purposive tax planning is opposite thing.
How To Deal With Taxes?
In order to get you informed how to make good tax planning for 2021. Here are some useful examples.
A good example of tax planning is saving money using a retirement plan. If you are under 50, you can reduce your annual income by $5.500 and $6.500 if you are older. So for example, if your annual income is $50.000 and you are 60-year old, you will decrease your income to $43.500. In that way, you will save your money for old age and simultaneously make taxes lower.
Another way of managing your taxes in a better way is withholding. It could be useful, but if you don’t pay enough withholding, then you will probably face some penalties. So for sake of avoiding charges and penalties you are supposed to pay 25 percent of 90 percent of the current year’s tax liability or 100 percent of the prior year’s tax liability. In case that you are married and making 150.000 dollars annual income, or in case that you are single and making 75.000 dollars annual income, you have to pay 110 percent of the prior year’s tax liability.
Other Useful Tips
If you already have some extra money that you are willing to donate, you could do that and eventually this could save your money in the long run.
When we already talk about donating, you can gift your adult child or anyone else up to 14.000 dollars, and this money is not going to be taxed.
You can use a flexible spending account, in this so called “use it or lose it” accounts you can, in some cases, roll over 500 dollars to the following year.
New Tax Law 2021
It’s definitely time to prepare a new tax plan because the new tax law is going to be in power very soon. It’s going to bring us some very important changes like increased standard deduction to $12.000 for single or married filing separately. $24,000 married filing jointly and increased to $18.000 for the Head of Household; state and local sale taxes will be limited to $10.000, there will not be a tax penalty for not having health insurance, which is good news, and many other significant changes.
Summary
Now you know about the importance of tax planning. Just calculate everything precisely, and you will notice that you will save thousands of dollars on a yearly basis.