Tax planning is the strategic management of financial affairs to legally minimise tax liability and achieve financial goals. In this blog, Engage Experts UAE provides a detailed guide to tax planning and strategies.
Alicia Tuovila, a certified public accountant in her detailed article wrote;
“There’s more to tax planning than keeping track of your important tax documents—although that is a great start. Proper tax planning utilises the current tax law to maximise your tax deductions and credits and minimise your tax liability”
Key Components of Tax Planning
1- Deducting:
Defined as Maximising deduction and credits, deducting is an important aspect of tax planning. Touville stresses the importance of deducting and emphasising individuals to take advantage of all available deductions and credits. Deduction can be practised in two ways.
1-Itemised Deduction: Labelled as expenses an individual spent within the year. It can be used to reduce taxable income.The following expenses can be used in itemised deductions;
- Real Property tax
- Mortgage tax
- Charity amount
- State and local income taxes
- Personal property taxes
2- Standard Deduction: A simple method provided by the internal revenue service (IRS), standard deduction is a fixed amount individuals can deduct from their adjusted gross income to pay lower tax income.
2- Deferring:
Labelled as timing income and expenses, deferring results in substantial tax savings. Increased expenses and deferring income reduce tax liabilities by capitalising on the time and values of money.
3- Dividing:
Dividing, also termed as Income splitting strategies, involve legally shifting income to family members in lower tax brackets.This method is used to optimise tax burden within the family to maximise tax saving for all the members involved.
4- Disguising
It involves investing in tax-saving vehicles to reduce tax liabilities. It can also be done by disguising income into lower-taxed form such as capital gains to improve tax outcomes.
5- Dodging
Defined as Ethical tax avoidance, Dodging is differentiated by Tuovila from illegal tax evasion. It involves structuring financial affairs to minimise tax obligations. Administering tax-efficient plans can help individuals and businesses pay the lowest possible taxes within the boundary of the law.
Tax Planning Strategies for Individuals
Tax planning strategies involve recognizing tax credits in contrast to expenditure and finding solutions to maximise tax deductions. It also involves investing in tax saving investments for tax-friendly retirement.
1- Standard vs. Itemised Deductions
Inorder to improve tax savings, it is crucial to understand itemised and standard deduction. As Tuovila explains, “Taxpayers should assess their financial circumstances to decide the most beneficial deduction method”.
2- Maximising Tax Credits:
Tax credits are used to reduce tax liability. There are various types of credits that can be used to maximise tax saving. It includes;
- Tax credit for children such as adoption credit, child and dependent care credit etc
- Education credit such as American opportunity tax credit and lifetime learning credit.
- Earned income tax credit
- Clean vehicle tax credit
- Energy efficiency tax credit
- Education funds
3- Tax-Advantaged Investments and Retirement Planning
Investing in tax-saving vehicles and retirement are core components of individual tax planning. Tuovila emphasises the importance of tax-efficient investments, retirement accounts, and strategic contributions to optimise long-term financial outcomes.
Tax Planning Strategies for Businesses
Here are some common tax planning practices for businesses;
Utilising the Qualified Business Income (QBI) Deduction
Business owners can take advantage of the QBI deduction to reduce taxable income. The QBI deduction enables business owners to deduct up to 20% share of their income. Though it is essential to understand eligibility criteria and maximising qualified business income to optimise tax savings.
Timing Income and Expenses
Strategically timing business income and expenses can positively impact tax liabilities. It is advised by experts to align revenue and expenditure in a year ( more towards the end) to reduce tax burden.
Planning Capital Gains and Losses
Managing capital gains and losses can have a profound effect on tax duty for businesses. Experts suggest exploring opportunities for tax-deferred exchanges and investments in qualified opportunity funds to ease tax liabilities.
Setting Up Retirement Accounts for Tax Benefits
Creating retirement accounts offers tax advantages for businesses and employees alike. Exploring retirement account options can help in efficient tax saving and employee benefits.
Tax Planning and Strategies for Investors
A well planned tax strategy helps expand investment more quickly while minimising tax liability. Advisors recommend diversifying investment portfolios to minimize risk in the future.
Diversifying Investment Portfolios
Diversifying investment portfolios helps reduce long-term risk because of the fluctuation in the market and continuous amendment in the law. Experts recommend keeping funds in various accounts, such as tax-deferred and tax-exempt accounts, to maximize tax savings in the future.
Harvesting Investment Losses
You can do this by selling the devalued investment at a loss. By harvesting investment losses, you can minimize the tax on capital gains acquired in the same year. Selling an investment at a loss creates a realized loss that you can apply against profit to reduce the taxable amount.
Effective Tax Planning To Maximise Tax Saving
Tax planning is crucial to maximise tax saving therefore it is important to consider the tax aspect in personal, business and investment decisions. Discussing your plans whether present or future with a tax professional can help make sound decisions. Tax deduction and credits are important components of tax planning to know which one to leverage to minimise tax duty. Timing revenue and expenses within a year can also aid in minimising tax saving. Also a great way to save money is by funding a retirement account for long term benefit. In short, implementing a well-designed tax plan is essential for maximising tax savings and achieving financial success.
