Tax preparation can be a very complex task. Many times we don’t even know what we owe the authorities, let alone how much we should pay. While tax planning can save us money in the long term by planning for the tax season ahead of time, it’s also important to take into account the present day value of all tax-free savings that you’ve obtained in the past. The purpose of this article is to give tax professional’s advice on tax planning.
Tax purposive tax planning is the procedure of analyzing a current situation or a hypothetical tax plan from a purposive tax standpoint. Purposive tax planning includes many considerations. The first step is to determine the individual’s residential status. Taxation laws vary from jurisdiction to jurisdiction, so it is not always easy to know the residential status of the person for whom you are considering preparing a tax plan. Considerations like the number of rooms in the house, current and future income, potential rental income, cost of living including utilities, potential capital gains, current debts, etc.
The next step in effective tax planning involves estimating the taxpayers’ current annual income and expenditure. A standard rule of thumb is to assume that each taxpayer has the same number of hours of work (based on annual hours worked) and takes off his or her own hat(hours worked). The next step is to consider the average number of taxes (e.g., income tax liability) that the taxpayers will need to pay over the course of the year. These include both federal and local taxes.
After estimating the taxpayers’ income and expenses, the next step is to calculate the taxable income. This includes both the total income of the household, together with any other incomes that might be included in the household (e.g., interest and dividends received, alimony paid, child support paid). The next step in tax planning is to estimate the taxable area in terms of the states in which the taxpayer resides. Each state has its own taxation structure, so this area will vary from one state to another.
The next thing in tax planning is estimating the short-range tax liability for the year. In most states, short-range tax liability means the total amount that the taxpayer will be assessed against if he or she fails to file a return by a certain date (usually the April 15th deadline for filing federal tax returns). The next step in tax planning is to consider the financial impact of changes to the household’s financial structure, such as a marriage or divorce. If the resulting family balance sheet changes significantly, short-range tax liability can also increase.
The final step in tax planning involves taking into account any other tax liabilities not addressed in the previous section (e.g., state income taxes and local property taxes). These include: Gifts, interest from business activities, income from membership in a professional organization, dividends received, and mortgage interest and payments. By reducing these areas, any remaining deductions can be allocated to the appropriate categories. As a result, the best possible outcome for the taxpayer is a total that is accurate as well as the most achievable, which is a reasonable balance between tax liabilities and deductions.