Tax planning can be a daunting task, especially if you are a beginner. That’s why we put together this article to help you get started! We will discuss six crucial tax strategies and concepts for beginners to understand. We will also provide some tips on how to reduce your taxable income. It’s important to remember that the more you know about tax planning, the better prepared you will be to save money on your taxes!
What is Taxable Income?
The first thing to understand is what is and isn’t a taxable income. Taxable income is a portion of your income used to determine how much tax you owe to the government in a tax year. These types of income include: wages, salary, any bonuses received, tips, investment income, and even possibly some unearned income (i.e., canceled debts, unemployment benefits, disability payments, and lottery income). Taxable income also can be from money earned from appreciated assets (assets that have increased in value) sold throughout the year.
However, some types of income are not taxable, such as child support payments and gifts. So it’s essential to know which kind of income is taxable so that you can adequately plan your taxes.
Reducing Taxable Income
There are several “tax strategies” to reduce your taxable income; the IRS offers tax filers the options of either claim in the standard deduction or a list of itemized deductions. These itemized deductions can include interest paid on mortgages, medical expenses exceeding a threshold set by the IRS, and many others. If you want to reduce your income, it is essential to take advantage of tax deductions. For example, deductible expenses can include mortgage interest, charitable donations, and business expenses. Another way to reduce your taxable income is to invest in tax-advantaged accounts, such as 401(k)s and IRAs. These accounts allow you to save for retirement while also getting a tax break.
Individual Tax Planning
If you are an individual, your tax planning will likely involve figuring out which deductions you can take advantage of. You may also need to consider how your investments will be taxed.
Business Tax Planning
Businesses have a bit more complexity regarding taxes, as they must pay both federal and state taxes. However, there are many ways that companies can reduce their tax liability, such as by taking advantage of tax credits and business deductions.
Estate and Gift Tax
Estate and gift tax planning are important for two reasons. First, they can help you minimize the amount of taxes your heirs will owe after you pass away. Second, they can help ensure that your assets are distributed according to your wishes.
The estate tax is a tax on the transfer of your property at your death. Everything you own or have interests in is accounted for on the date of death. This can include cash and securities, real estate, insurance, trusts, annuities, business interests, and other assets. If you give someone money or property during your life, you may be subject to the federal gift tax.
The gift tax is a tax on the transfer of a property while receiving less than the total value in return. The tax applies whether or not the donor intends the transfer to be a gift. The gift tax applies to the transfer, by gifting, of any property type. You make a gift if you give property (including money) or give the use of or income from the property without expecting to receive something of at least equal value in return. If you sell something at less than full value or if you make an interest-free or reduced-interest loan, you may be making a gift.
Retirement Savings and Taxes
Retirement savings also play a role in taxes, as you will likely owe taxes on the money you withdraw from your retirement account. You have to pay income tax on your pension and on withdrawals from any tax-deferred investments—such as traditional IRAs, 401(k)s, 403(b)s, and similar retirement plans, and tax-deferred annuities—in the year you take the money. The taxes that are due reduce the amount you have left to spend.
Consult with a Tax Professional
There are many moving parts when it comes to tax planning and tax strategies, but it’s crucial to get started sooner rather than later. The more you know about taxes, the better prepared you will be to save money on your tax bill. If you have any questions, be sure to reach out and consult a professional at Iron Point Financial. We would be happy to help you navigate the world of tax planning!
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advise.
Iron Point Financial offices in Grove City, PA and Greenville, PA. We serve the Grove City, Greenville, Erie, Cranberry Township, and Boardman, OH areas.
