Tax Planning
What is Tax Planning and why is it important?
Tax planning is a tool to analyze and arrange financial activities to minimize tax liability and maximize tax efficiency. Tax Planning is essential for all taxpayers, regardless of income. Taxpayers who neglect tax planning often pay more tax than necessary. As a result, they have less leftover to save for goals. As the cost-of-living continues to climb, it
is even more important to understand where your money is going.
Tax Planning has dual benefits. It increases your savings for the future while reducing your tax burden. With tax planning you lower your taxable income. As a result, you owe less tax. More of your money is diverted into tax-advantaged accounts that align with your financial goals.
With effective tax planning, you can expect to see these benefits:
Tax Reduction: Utilize deductions, exemptions, and credits to lower taxable income.
Boost Savings: Maximize tax-advantaged investments to increase overall savings. Examples of tax-advantaged investments include; IRA, 401K, HSA, 529, Tax exempt interest/bonds.
Financial Goal Alignment: Plan taxes with specific objectives in mind, such as retirement, education, or major purchases.
Legal Compliance: Avoid audits, fines, or penalties by adhering to tax regulations. Minimize tax liability legally.
“In this world nothing can be certain, except death and taxes.” -Benjamin Franklyn
While paying tax is a certainty. The amount is not. Calculating Income tax is not a simple equation. Not all income is treated the same when it comes to accessing income tax. Some income is taxed at 0% other income can be taxed at up to 37%. There are thousands of pages of tax regulations. Each page with restrictions and exceptions, written in jargon that the average taxpayer cannot make sense of. This is where hiring an experienced Tax Professional pays off.
“Tax planning with Neighbor Tax was more than I ever expected. She took the time to explain how I could save on taxes by saving for retirement. I went from owing thousands to getting a refund.” -Gaspar
Compare two taxpayers, with different outcomes. Sara and Lisa both earned similar yearly incomes, but they took very different approaches to their finances.
Sarah planned ahead. She understood that tax planning isn’t something to think about after the year is over. Instead of waiting to see what she owed at tax time, she asked an important question:
“What can I do now to reduce my tax burden while also building my financial future?”
Sarah reviewed her finances with Neighbor Tax to identify legitimate tax-saving strategies before December 31. For Sarah tax planning isn’t just “paying less tax.” It’s a tool to understand where her money is going and keeping more of it by diverting it into tax-advantaged accounts. With tax planning, Sarah was able to reduce her tax liability while saving in a tax-advantaged account.
Lisa tried to tax plan on her own but quickly felt overwhelmed by all of the information. She put it aside and didn’t look at her finances again until after December 31. By then the tax year had already ended, and she missed opportunities to make decisions that could have lowered her tax burden.
Lisa paid taxes based on her earned income, and because she didn’t incorporate tax planning into her financial strategy, she has less leftover to save for her future. She wasn't able to take advantage of tax saving strategies because the tax year was already over.
Lisa didn’t realize that tax planning is most powerful before the tax year ends, not after it.
If tax planning is in your future, do not wait until after December 31. Contact your tax professional well before the end of year. While one tax planning session can be beneficial, quarterly tax planning sessions give a finer touch for understanding your tax situation and steering it in your favor. Ready to take control of your finances? Book here
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