What is Tax Planning?
Tax Planning refers to the analysis of the fiscal situation from a tax viewpoint. The sole purpose of tax planning is to conduct and perform in perfectly meeting your tax obligations by keeping in mind financial position.
Tax is the fee that government charges on the usage of their services and products. Every citizen living in the respective country has to pay the tax.
The aim of tax planning is to reduce your tax liability whilst protecting the money you earn.
Many times the taxpayers often end up investing in wasteful tax saving instruments. But, with proper tax planning, it’s possible to protect assets and resources as well as secure long-term wealth creation.
The best way to avoid tax planning mistakes is to engage a professional. Many firms can help you out with it and make you understand about tax planning.
There are three common mistakes people commit, especially the newcomers when it comes to tax planning:
The root of false tax planning is procrastination. Failing to make a plan and look at your options in time for the end of the tax year. Which means its just too late to reduce your tax bill.
2 Signing Up to the Wrong Plan
During the year a lot of people receive phone calls from the tax planners claiming why the “X” service is better for you. They will also pester about the different plans they have specially curated for you. It may seem tempting to you but hold yourself right there!
Make sure you communicate with an expert in situations who you can trust.
3 Failing To Optimise Current Position
Many taxpayers firmly believe in the following a section of the individual lawful act for tax saving. However, at times, even that wouldn’t reduce the tax liability. One needs to make the optimal use of the resources alongside for the maximum cutback in it.
Types of Tax Planning
There are four different types of tax planning:
1 Permissive tax planning
A plan that is made as per the articulated provision of the taxation laws is called permissive tax planning.
An example of permissive tax planning is a self employed individual claiming allowable expenses against their tax bill.
2 Purposive Tax Planning
This means creating an advantageous tax plan. But this tax plan has no expressed provision mentioned in the law.
An example of purposive tax planning is taking out tax saving pension schemes or residency arrangements.
3 Short Range Planning
Short Range Planning refers to tax planning that is made every year to arrive at specific objectives.
Generally the benefits of short range planning are at a tax payers highest rate of tax.
4 Long Range Tax Planning
Long Range Planning i s all about tax planning that is started but the benefits are not felt until the future.
An example of long range tax planning is Inheritance Tax Planning.
Objectives Of Tax Planning
The objectives of tax planning depends on the individual. But every taxpayer out there wishes to conserve a maximum part of their earnings while reducing their tax bill to as low as possible.
There’s a constant tug of war going on between the taxpayers and the tax collectors. The former continually wishes to have minimum tax liability. The latter always find the ways of extracting the maximum from the citizens.
The way to succeed in tax planning is to keep yourself up to date with taxes and engaging a professional to guide you through.
Tax Planning for the Self Employed
If you’re self employed then there are some basics things you should think about when it comes to tax planning:
- Stay organised – leaving all your taxes to the last minute means they will be done in a rush, mistakes made or that you miss out on permissive tax planning;
- Keep all your paperwork – if you don’t keep the receipt you can’t claim for it against your taxes;
- Consider long range tax planning options when your business profits allow;
- Always seek the advice of a professional, sooner rather than later.