4 Tax Planning strategies You Should Consider
Many people do not know that they can reduce their tax burden if they just take some time to engage in tax planning. Below are some strategies that you can use to reduce how much you pay in taxes without contravening any laws.
Defer Tax Payments
One way to reduce your overall tax burden is by using any available channels to defer making tax payments to a later time. For example, you may choose to invest part of your salary in a retirement scheme. You will have deferred paying taxes on that income until you start withdrawing funds from that retirement plan. This deferral allows your portfolio to grow at a faster rate than would have been possible if you had paid your taxes on that money as soon as your salary was deposited into your bank account.
It is also possible to reduce your tax burden by shifting your income. For example, one individual who buys stocks and sells them at a profit within a year may have their gains taxed at a higher level than another person who buys the same stocks and holds them for more than a year. In this second case, the individual will have shifted their stockholdings from being regarded as short-term (and therefore qualifying for higher tax rates) to long-term (thereby qualifying for lower tax rates).
Tax rates are also determined based on income brackets. For instance, someone earning the minimum wage may be taxed at the lowest tax rate when compared to another who earns five times the minimum wage. You can stay in a lower tax bracket by taking advantage of all the deductible expenses offered in your area. For example, you can reduce your taxable income by claiming a deduction for the interest on your home's mortgage payments.
Different jurisdictions often have avenues that one can use to avoid paying taxes on some of their income. For example, some jurisdictions exclude any money that is paid into an education fund. You can use such avenues to keep your money so that you reduce your tax bill. This is different from deferral because taxes are paid once funds are withdrawn from a scheme where the payment of taxes was postponed (deferred) to a later date.
Tax planning is a complex process to ensure that your actions are not considered as tax evasion. Consult a tax planning expert so that you can take advantage of any opportunities that may be created by the changing tax laws.