By - October 3, 2023
Categories: Accounting, Bookkeeping
Taxes are an unavoidable part of life, and for many individuals and businesses, it can be an overwhelming process and stressful financial burden. We often dread those spring months when tax season is in full swing and we’re rushing to gather the appropriate documents, financial statements, receipts, and more for tax planning and filing. However, by planning for taxes ahead of time throughout the year, you can reduce your tax liability and ensure you are well prepared for tax season. Plus, you won’t feel so rushed and stressed come tax crunch time. Read on for a few tax planning tips that can help you get ahead on your taxes and make the entire process smoother and less stressful.
Tax Planning Tips
Tip #1: Know what your taxes are before asking if you need to reduce them.
When planning for taxes, it’s important to have a clear understanding of what your taxes are. This will help you effectively reduce your tax liability. In order to do this, you must know your income, expenses, deductions, and credits. Take the time to thoroughly review your financial records and calculate your tax liability accurately. This is a foundational first step to help you start your tax planning efforts with the most accurate information.
Tip #2: Plan for taxes throughout the year.
The next tax planning tip is to plan and prepare for taxes throughout the year, not just once a year during the busy tax season. This is a common mistake that many people make. Then, they often find themselves in a rush, making errors, and struggling to get support from accountants who are already booked out with tax work. Tax planning should be an ongoing process that you do throughout the entire year. Review your financial situation and make adjustments regularly. This will help you avoid last-minute stress, feel more prepared, and can even lead to opportunities for tax savings.
Tip #3: Implement a 3 phase tax planning approach.
To help you plan for taxes throughout the year, implement a 3 phase tax planning approach. Here’s a breakdown of what each phase might look like.
Phase 1: While preparing the tax return for the previous year.
Begin the first phase of the tax planning process by reviewing the previous year’s tax return. Look at what your financial picture and overall financial health looked like. Ask yourself if there were any significant changes in your income and/or expenses. Check to see if this year’s trends are in line with last year’s. Take note of any projected financial growth or slowdowns, as this will inform your tax planning decisions.
Phase 2: End of June
Around the end of June, take another look at your financials thus far for the year. This is a great time to get a solid estimate of where you’re at and what the rest of the year will look like. If you’ve experienced good growth so far, you may want to consider increasing your estimated tax payments to avoid penalties and interest. This also gives you time to prepare for higher taxes in the spring by saving more for taxes. This is also an ideal phase to assess if there have been any major gains or losses in your income or business investments, as these may require you to adjust your tax planning strategy.
Phase 3: October or November
As the year progresses, continue to monitor your financial situation and take a look in October or November to see if any new opportunities for tax planning have emerged. This is the time where you may consider making significant purchases before the end of the year that will benefit your tax situation.
By implementing these 3 simple tax planning tips throughout the year, you can set yourself up for a less stressful (and surprising) tax return. You’ll head into tax season feeling confident in your decisions and prepared for any tax liability you must take care of. It’s important to remember that tax laws and regulations can change, so be sure to stay informed and consult with an accountant or tax professional to stay up-to-date. If you’re looking for support in preparing for your taxes, feel free to reach out to us and inquire about our accounting and tax planning services.
