All of us Americans are interested in paying less for our taxes each year, but how can we reduce our taxable income and increase our returns? This is part of what is commonly known as tax planning, and the subject of this post. If you have begun to take an active interest in securing your future financial success, you may be asking the question, what is tax planning? Tax planning is basically taking a logical, proactive approach to your financial situation, and evaluating the various methods of reducing your taxable income per year. This is where hiring an excellent financial advisor is to your great advantage. There is just too much information regarding the federal government, taxes and the stock market, for any one person to learn, let alone apply and make work for them. At least, for anyone who also has a job to do and a household to run! This is definitely something to concede to a professional, especially since we’re talking about your finances here. Your future success, if you want to be real. However, if it’s still in your nature to gather some general information on any topic you’re considering hiring someone to help you with, good for you! That’s exactly who this article is written for. 

The Basics 

Tax planning is using the tax code to your advantage, utilizing various absolutely legal and legitimate methods. These measures include things like deductions, credits, exemptions, rebates and concessions, to name a few. But it doesn’t stop there. Excellent tax planning strategies include income deferral or shifting and investment tax planning, to include the exploration of tax-exempt and tax-deferred investments, among multiple other investment strategies. Utilizing these methods does require meticulous, year-long planning and current working knowledge of the tax system and code, as well as the current stock market trends, etc. Tax planning at its core has three basic parts. The first is reducing your overall taxable income, which is done in various ways available to anyone – as long as you’re aware of them! The second is to increase the number of tax deductions you take advantage of throughout the year. Again, it pays to know what’s available to you, and it’s different for everyone. The third part is taking advantage of specific tax credits that are out there, and once again this entails a vast, working knowledge of the tax system. The idea, of course, is to maximize your “visible” income at the same time you’re investing in your future, and minimizing your taxes. 

The Importance Of A Good Financial Plan 

A good, solid financial plan that includes an investment portfolio is always the smartest option for your future financial success. A great financial advisor can go a long way towards securing you a profitable future, and earning the fees you pay out many times over, in most circumstances. He or she will take the amount of your investable assets, the level of risk you’re comfortable with taking, and the amount of time you want to invest, in order to put together a portfolio that is designed to reach the goals you set for yourself. Your financial advisor should take the time needed to get to know you and your family, the business you’re in etc., in order to better understand your needs and goals for the future. The better your financial advisor knows you, the better he or she can advise and invest for you. A person really doesn’t know their risk tolerance until they test out how steady their nerves really are, by making some investments. If you are tight with your financial advisor, they can assess this better right along with you, letting you know the pros and cons of a particular stock or venture you may be interested in. Remember, the higher the risk, the higher the potential returns, as well. But this kind of investing is not for everyone. The majority of people tend to want to stay at a minimum to a moderate level of risk, which is also fine. Any type of investing greatly and exponentially increases your chance of future financial success. Tax planning is just a part, albeit an important part, of a solid and comprehensive financial plan. 

Investment Tax Planning 

Lastly, while we’re on the subject of tax planning and investing for your future, investment tax planning should not be overlooked. We brought it up briefly, but let’s give it a more thorough overview. Since we are on the topic of tax planning, investment tax planning is equally important. The entire method is centered around planning your entire year’s strategy around being as tax-efficient as possible. Since the overall goal is to make as much money possible while appearing to take a comparative loss, we’re going to need to make some very strategic investments. This is where this type of investment tax planning strategy is of key importance. There are many different options you or your advisor have, in order to optimize your most tax-efficient investments. Some good examples are things like tax-managed stock funds and ETFs (exchange-traded funds) due to the fact that they trigger less capital gains, treasury bonds and savings bonds are exempt from local and state taxes, municipal bonds are typically federal and state tax-free, and tax-exempt mutual funds, which are a collection of either stocks, bonds or a combination of both. With all of these examples, you pay either a minimum amount or zero in taxes on any returns on these investments, making them a very shrewd investment. Another strategic, tax-free investment in your future is worth mentioning, and that’s a Roth IRA or Roth 401K. This is an investment in your retirement fund, tax-free. You can contribute up to about 6K a year, and although you can’t deduct what you put in, when you want to start withdrawing at the minimum age of 59-½ (as long as you’ve had the account open for a minimum of five years), your money is tax-free, including all the returns from these investments. In conclusion, I hope you’ve gotten some good basic information on tax planning and investment tax planning. Happy investing!