Tax Planning Strategies and How to Avoid Overpaying



Tax Planning StrategiesOver your entire lifetime a considerable amount of your income will be consumed by income tax. Depending on how much you make, you will contribute a higher or lower percentage of everything you earn to the state in accordance with the taxation laws that govern these payments.  If you don’t take at least a few minutes to find one of the many tax planning strategies that exist, you could end up with far less of your money than you could otherwise.

The taxation system is incredibly complex and it is all too easy to end up paying more tax than you actually have to. Here we take a look at a few ways you can ensure that you are paying the right amount of tax.

 

Why We Need Tax Planning Strategies:

People don’t realize it, but the codes are neither written fairly or efficient.  What one person “thinks” they have to pay, another person can find an exception or rule that will allow him or her to save their money and only pay a fraction of the cost owed.

One example of this in the U.S. taxes owed by owning stocks.  When you own stocks for less than one year, the amount of money you pay are significantly higher than what you would pay if you hold the stocks for more than one year.  A savvy investor would pay attention to both the actual stock and the taxes owed as part of their planning strategy.

Stocks aren’t the only thing.  Rental properties, business taxes, other investments, and plenty more income generating assets or services carry the same types of caveats.  If you don’t educate yourself on the rules of the tax code, the difference in tax payments could be huge.

 

Get The Right Tax Code:

Though you may think it should be easy enough for the government to attribute you the right tax code and deduct the correct amount from your monthly salary, it is often the case that individuals spend a great deal of time being taxed too much.  This is why there are tax refunds at the end of year for those who over-pay.

To prevent this from happening in the present, it’s a good idea to double check your tax code and ensure that the amount being deducted matches the amount you were expecting. If not, contact the human relations department at your employer for clarification.

 

Use An Tax-Deferred Savings Accounts:

Tax deferred savings accounts (generally setup for retirement) are a fantastic way to put a little money away each month without paying tax right now on the principal or earnings.  In the U.S. this is typically a 401k or IRA.  In the UK this is called an ISA.  Each type allows individuals an annual allowance ranging from $5,500 USD to $17,500 USD in tax-free savings to accrue over the year.  These accounts may consist of stable cash products or be invested in more risky stocks and bonds.

 

Know Your Tax Levels:

Nearly all forms of tax are subject to various levels of taxation. The two most important ones are probably your income and capital gains taxes.  Just like in our example above, planning on how long you need to hold a stock will make a huge difference between how much or how little you will end up paying ultimately for the proceeds on that stock once it is sold.  The same is true for real estate and business expenses.

 

Related Posts:

1) The Now or Later Tax Refund

2) How the Lower Taxes From a Long Term Capital Gain Can Work Into Your Early Retirement Plan

3) The Facts About Tax Free Investments With an ISA

 

Image courtesy of FreeDigitalPhotos.net

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