Tax Planning 101: Tips for Individuals and Businesses To Maximize Tax Breaks
There’s no escaping it: everyone has to deal with taxes. At best, it’s a mildly stressful experience. At worst, it can be overwhelming.
But what if we told you it doesn’t have to be? What if, with the right amount of tax planning and support, tax season could actually be an organized, straightforward, even easy process?
What is tax planning?
Think of tax planning like a game between you and the government: taxes are a maze, and the IRS has left deductions, credits, breaks, and loopholes scattered throughout. It’s up to you to find as many as you can before you can escape, unscathed. (Admittedly, that sounds more like “The Hunger Games”–but you get the idea.)
Tax planning is the process of educating yourself on and positioning yourself to receive as many tax breaks as possible.
Tax planning is one of the many reasons people choose to hire a Minnesota CPA. It’s our job to know state and federal tax law and be up-to-date on all tax deductions and credits, so you don’t have to be. With our expertise, we can help you get the most out of your yearly income and minimize how much you owe.
When you choose Wood CPA to file your tax returns, tax planning services will be built into the fee going forward. We want to make sure every client is informed and feels confident in their financial future.
How does tax planning benefit me?
Tax planning allows individuals to take advantage of tax breaks or tax laws that have changed over the past year. Being knowledgeable of tax breaks and credits makes it easier to plan how much you spend, how much you save, your contributions to your retirement accounts, etc.. You want to make sure you get the most money out of your income as possible.
For businesses, tax planning is essential to minimizing the taxes you pay and maximizing all available tax credits and deductions. As the old adage goes, you have to spend money to make money–and while the government levies taxes on the money you make, they also try to give you a break on the money you spend.
Below, we break down some tax planning strategies for both individuals and businesses.
3 Tax Planning Tips for Individuals:
- Know Your Bracket
Before you begin tax planning, you need to understand what tax bracket you’re in.
Your tax bracket tells you how much of your income is subject to taxes. With 2022 adjustments and changes, your bracket may have changed. You can check your current 2022 bracket here.
(Note that your entire income won’t be taxed at your bracket’s percentage, because not all income will be taxable. Additionally, the marginal tax rate ensures that parts of your income will be charged at a lower rate than your bracket.)
Once you have an expectation of how much the government will be taking out of your checks, you can now focus on tax planning to either get some of that money back or reduce the amount you owe at the end of the year.
- Reduce Your Income
Finding ways to reduce your income is the foundational strategy of tax planning. While your gross income is the total amount of income you make before taxes, your adjusted gross income (AGI) is the amount of income that is actually taxable.
You’ll want to investigate all the ways in which you could reduce that number. Making contributions to your 401(k), your traditional IRA, and paying off student loan interest, are all ways to decrease your AGI. (Also, check out our blog on What Happens When You Over-Contribute to your retirement accounts.)
Note: If you withdraw funds from most retirement accounts before a certain age, that income will be subject to tax and you may incur a fee. So, make sure you can afford to put that money away for a long time!
- Tax Deductions & Tax Credits
Tax deductions decrease your AGI. You subtract them from your gross income, which can even drop you down a bracket. All the things we listed above–401(k), traditional IRA, etc.–are tax deductions.
Other popular deductions include:
- Medical expense deduction
- Mortgage interest deduction
- Charitable donations deduction
- And more!
With every tax deduction applied to your gross income, your AGI decreases.
Tax credits, on the other hand, reduce the amount of taxes that you owe. Think of them like money vouchers that you can apply to your tax return.
Popular tax credits include:
- Child tax credit
- Lifetime learning credit
- Adoption credit
- Saver’s credit
(You can find a full list of 2022 popular deductions and credits here).
Your CPA will be able to tell you all of the deductions and credits that apply to you. And, they can help you plan for future tax seasons by positioning you to take advantage of even more tax breaks.
3 Tax Planning Strategies for Small Businesses
Not only is Wood CPA a small business accountant, but we also offer tax preparation services for businesses. That means we can balance your books and make sure you’re getting the most out of your business’s earnings.
- Tracking Income & Expenses
If tracking income and expenses is important for the individual, then it’s crucial for a business. There are so many costs sustained, purchases made, and expenses incurred that if you don’t keep records, you’ll find that your tax season actually does feel like “The Hunger Games.”
According to the IRS, you need to keep track of:
- Gross receipts: Receipts, cash invoices, register tapes, etc.
- Purchases and expenses: Checks, proofs of payment, credit card statements, etc.
- Employment taxes: see the IRS’s list of what employee records you need to keep.
- Assets: Property owned by the business, improvements made, how the property is used, etc.
- Travel, transportation, entertainment, and gifts.
(Find a full description of records you need to track according to the IRS here.)
All of these records will help you figure out exactly what your taxable income is, as well as which deductions and credits your business qualifies for.
- Maximize All Deductions and Credits
Much like an individual, a business needs to make sure they’re taking advantage of all possible deductions and credits available to them.
Some common small business deductions include:
- Cost of goods sold
- Qualified business income
- Travel
- Advertising
- Home office
There are many other steps you can take to increase the amount of deductions and credits. For example, retirement plans: The IRS states that if you contribute to a retirement plan for yourself and your employees, you can:
- Deduct your retirement contributions from your taxable income.
- Qualify for credits to cover some of the process of implementing the retirement plan.
- Let your assets grow, tax-free.
Other employee benefits that you can deduct from your taxable income include bonuses, sick pay, vacation pay, advances, loans, and any other fringe benefits you offer.
- Accelerate or defer Income
If they use the cash method of accounting on their books, some businesses either accelerate or defer their income to take advantage of preferred tax rates.
Accelerating or deferring your income just means that you either try to collect as many payments as you can before the current year ends, or you push your earnings into the next year.
Why might you do this? Well, if you know that you’ll be moving into a higher tax bracket in 2023, you might accelerate your income so that more money is taxed this year, at the lower rate.
Or, say you had an unexpectedly high income in 2022, and don’t want to be taxed at a higher bracket. In that case, you might wait to invoice your clients until January 2023, deferring that income to next year.
(Pro Tip: You can also do this with your expenses.)
When is a good time to set up a tax planning appointment with your CPA?
If you’re not sure about filing your own taxes, hire a trusted Minnesota CPA. CPAs are tax experts who can tax-plan with you and for you. Business News Daily suggests (and we agree) that you should consider hiring a CPA:
- At tax time
- Before you start your business
- When you have complex financial decisions to make
- Or, when you plan to make major changes to the ownership of the business
Any of these events can have lasting implications for your financial well-being. If you’re interested in taking advantage of tax planning services, contact the small business accountants and tax professionals at Wood CPA to schedule an appointment today.
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