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Tax planning is an important part of your “income tax world.” However, it is particularly important to businesses and self-employed individuals who have many ways to reduce their taxes – in the form of tax deductions, tax credits, and so on. The world of tax planning is relatively simple for salaried individuals, who can simply save money owed on taxes by investing in a traditional IRA or some other retirement plan. This brings us to the question: what is tax planning and what does it encompass? Understanding it thoroughly helps freelance workers and other self-employed individuals with their tax preparation.
What is Tax Planning?
Tax planning is the process of making sure that an individual pays the lowest taxes possible. It includes financial planning and making the most of tax breaks. The Investopedia definition of tax planning says, “Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient.”
What is Included in Tax Planning?
Tax planning focuses on taking advantage of all the possible ways to reduce your tax liability. It uses tax deductions, tax credits, and investment plans to reduce taxable income. Take a look at how each option works.
Business Deductions
The first thing any Certified Public Accountant uses to reduce taxable income is qualified business deductions. These are business expenses that are deductible. Common business expenses that can be deducted are travel, meals, office supplies, marketing and advertising, utility bills, home office rent, education, and more. You can write off all of these business expenses as per the rules of the IRS, but there are a few things that you need to keep in mind.
- Make sure to keep a record of all your business expenses.
- There are two methods to calculate business expenses: standard and itemized. A standard method uses a flat rate, whereas an itemized method takes into account the actual expense.
- The IRS can audit your return at any time and ask for an explanation of your business expenses if you use the itemized method. Generally, the IRS can audit your return at any time within three years of filing.
You can use professional income tax services for freelancers to optimize your tax return through the use of deductions.
