Tax planning and financial planning are the two most important roadmaps to help you make important financial decisions and to plan for your future. Let’s read about them individually to understand them better and how important they are to each other.
What is Tax Planning?
The idea behind tax planning is to determine a person’s financial situation or plans to maximise all the deductions, exemptions, allowances, and rebates that are allowable legitimately to decrease their tax liability. Reduction of tax liability and maximizing contributions to retirement plans are crucial for success. In simpler words, tax planning ensures you pay the lowest taxes possible, making it essential to an individual investor’s financial plan as it saves or leaves more cash for other purposes.
Benefits of Tax Planning Strategies
In addition to saving people money, tax planning strategies help taxpayers avoid penalties, save pennies, keep financial documents organised, understand liabilities, deductions, and financial solutions for protecting assets, and make financial plans for the future
Tax planning considers factors like:
- Timing of income
- Timing of purchases
- Planning expenditures
- Retirement savings strategy
- Tax filing status and deductions
How does tax planning benefit businesses?
The four types of taxes that the federal government levies are income tax, self-employment tax, taxes for employers, and excise taxes. Tax planning benefits small businesses with:
- Healthcare tax credit
- Work opportunity tax credit
- Employee retention credit
What is Financial Planning?
Financial planning is a broad term that encompasses all aspects of a person’s or a business’s financial affairs. These can be anything from budgeting to retirement savings to estate planning.
Now to the main question, how does financial planning benefits individuals and businesses?
Like tax planning, it helps you make the most of your money and save it for short-term goals like college funds or long-term plans like retirement. It requires lifestyle changes to achieve the desired outcome.
Comprehensive financial planning
A comprehensive financial plan is a road map that defines where you are now, where you want to be in the future, and how to get there.
Comprehensive financial plans cover areas like:
- Cash flow analysis
- Asset allocation
- Retirement income security analysis
- Healthcare insurance coverage
- Estate planning
- Tax minimisation strategies
How does Tax Planning help Financial Planning goals?
Retirement Planning
Are you currently enrolled in your employer’s 401(k) plan? Then you must have some of your retirement savings held in tax-deferred accounts. If you move some of your retirement assets to a tax-free account, you will be able to meet your cash flow needs in your retirement years.
Investment Planning
Track how much your investments have gained or lost throughout the fiscal year and ask your financial advisor to create strategies that work to limit your tax liability, including tax loss harvesting.
Gifts and Charitable donations
Is your child getting married, or are you helping them with a substantial amount of money during the year for different reasons? Making gifting strategies with your financial advisor can allow you to transfer funds without incurring tax penalties.
It can be shocking for a small business owner to see how large your tax liabilities can be each year as your income grows. Your tax bills must be piling up with all those State and Federal income taxes to self-employment taxes. Therefore, tax planning is essential to running a successful business and planning your finances for long-term goals.
