Throughout the year 2020, we all faced a major change in our lifestyle and working due to the COVID-19 pandemic. Only a few days left at the ending of 2020, and we are expecting a prosperous 2021. As the year is changing, you need to develop new tax plans according to the taxation policies of the year 2021. The new year includes various changes in taxation policies as compared to the year 2020.
Tax planning means the process of developing a plan to face taxation policies by calculating taxable income, deductions, and much more. It is essential to do tax planning because it helps you in saving millions of dollars legally. Meanwhile, people stay confused about how to do tax planning. If you are one of them, then this blog post is for you. You can choose from a wealth of tax planning strategies to reduce your tax expenses and increase savings. Experts have designed a dedicated procedure to do effective tax planning. All you need to do is to follow a step-by-step process discussed below.
- Calculate taxable income:
As we know, the tax amount is calculated from the taxable income of an individual. The process of tax planning starts with calculating your taxable income. Whether you are a salaried employee or an entrepreneur, taxes on your income are imposed under the specified income category. Suppose you are a salaried employee tax on your income will be imposed under salary head. Like this, every type of income is categorized under different income head. You have to add income generated from all the income heads if you are earning revenues from multiple sources. By doing this, you can calculate your total taxable income on which you have to pay tax in the future. Once you get to know your total taxable income, you can develop effective plans accordingly.
- Analyze deductions:
Analyzing deductions is one of the most crucial steps of the tax planning process. Deductions facilitate an assessee (taxpayer) with various discounts on the total amount of tax. By claiming appropriate deductions, you can save a large part of your tax expenditure legally. Every income head features a different deduction criterion, and even some incomes are exempted from the tax. All you need to do is to claim the deductions offered by your nation’s government. For example, $0.0565 per mile is deductible if you are using a vehicle for professional purposes. You can file tax deductions online or by consulting an accountant or an income tax consultant. Mainly, people feel shy and keep paying the whole tax amount, though every taxpayer has the right to claim deductions. I suggest you should claim every tax deduction without any hesitation.
- Search for relevant tax planning strategies:
After analyzing deductions, let’s move towards another crucial step of this procedure. Tax planning strategies include various tips and tricks to save your income from additional taxes. You can choose from a wealth of tax planning strategies offered by the government of your country. Maximizing HSA (Health Saving Account), Investing in mutual bonds, tax credits, etc., are some of the best tax strategies to choose from. All these strategies help you in saving your income from the taxes legally and promote your tax planning. So, if you are doing tax planning, always consider relevant tax planning strategies for better productivity.
- Choose the most suitable strategies:
You might confuse while choosing one tax planning strategy from the glut. It is recommended you should choose tax strategies according to your income and income sources. Let’s take an example for better clarification. Suppose you are earning $40000 from the operational activity, and it costs you around $50000. It means you are incurring a loss of $10000 from that activity. You can deduct the loss amount from the total taxable income, and you need to pay tax on $30000 only. If you also incur this kind of loss, negative gearing is the best tax strategy for you. Besides this, you can choose multiple tax strategies to save your income from additional taxes.
- Implement them:
The process of tax planning includes but is not limited to selecting suitable tax strategies only. You also have to implement the whole plan into reality. Analyze various income heads and calculate your total taxable income for this year. Claim all the deductions every time you earn income under a particular income head. Implement all the tax planning strategies you had chosen earlier. Make sure you are implementing these strategies legally. Do not make any illegal steps for saving your income from taxes. If you do so, you have to pay 300 times of total tax amount, and you will be punished for the same as well. Also, never try to hide your income from the vision of the government. It is an illegal offense, and tax authorities will punish you with imprisonment as well as a fine.
Taxes are the contribution of an individual towards his nation’s development. Every citizen who is earning a livelihood in the country is responsible for paying tax on his income. However, it is one of the major expenses for an individual. We all spend a good part of our income as tax to the country. Meanwhile, we can manage our tax expenditure in a better way and save our income from taxes. All you need to do is follow the dedicated procedure discussed above. As discussed earlier, always choose strategies that are legal in the eyes of your nation’s government. Never try to hide your income to protect yourself from the taxes as it is an illegal offense, and you will be punished for the same. Visit- UBOS