Tax Planning: What Is It, WHY YOU NEED ONE, And How To Start

Summary

In this video, Sherman the CPA explains the importance of tax planning for every taxpayer, emphasizing that most people unknowingly overpay taxes. He defines tax planning as using the tax code to legally minimize taxes and highlights the two main steps: analysis and arrangement. By thoroughly examining one's financial situation and making strategic changes, such as adjusting deductions and investments, individuals and businesses can reduce their tax liabilities significantly. Sherman also demonstrates tax planning with real examples, showing how a proper plan can save thousands in taxes.

Takeaways

• 😀 Every taxpayer needs a tax plan to avoid overpaying taxes to the IRS.
• 😀 Most people are unaware of what a tax plan is and how it can help reduce taxes.
• 😀 Tax planning involves using tax laws, which include over 70,000 pages of deductions, credits, and incentives, to legally pay the least amount of taxes possible.
• 😀 A tax plan includes analyzing a taxpayer's financial situation, income level, tax bracket, and current tax payments.
• 😀 General tax advice often doesn't apply to everyone's unique financial situation—personalized tax analysis is critical.
• 😀 Once your tax analysis is complete, the next step is 'Arrangement'—arranging your financial situation to reduce your taxes by utilizing tax laws effectively.
• 😀 Tax planning doesn't mean earning less income, but using deductions, credits, and investments to reduce the taxable income reported on your return.
• 😀 High-net-worth individuals, like Warren Buffett and Jeff Bezos, use tax planning strategies to pay little to no taxes despite earning large incomes.
• 😀 A proper tax plan identifies opportunities to reduce taxes through deductions, credits, and various investment strategies tailored to your situation.
• 😀 The tax planning process involves two phases: analysis (understanding your current tax situation) and arrangement (making strategic financial adjustments to lower taxes).
• 😀 Effective tax planning can significantly reduce your tax bill—for example, turning a $62,000 tax bill into under $2,000 by making the right changes and utilizing proper deductions.

Q & A

What is a tax plan and why is it important?

A tax plan is a strategy that uses the tax law to help taxpayers pay the least amount of taxes possible. It's important because without a proper tax plan, many people forfeit too much of their hard-earned money due to a lack of knowledge or planning.

Why do most people not have a tax plan?

Most people don't have a tax plan because they don't even know what it is. If you asked the average person, they likely wouldn't know what a tax plan involves or how it can help them reduce taxes.

What is the main goal of tax planning?

The main goal of tax planning is to analyze a taxpayer's financial situation and use the tax law to reduce the amount of taxes they pay, taking advantage of deductions, credits, and other incentives.

How does a tax analysis work in the tax planning process?

A tax analysis involves reviewing your financial situation, including your income level, tax bracket, and the taxes you currently pay or expect to pay. This helps identify opportunities to reduce taxes.

Why is it important to conduct a tax analysis rather than following general advice?

General tax advice may not apply to your specific financial situation. A personalized tax analysis ensures that you're taking the most relevant steps to reduce your taxes based on your unique income, financial goals, and tax bracket.

What is meant by 'arranging your financial situation' in tax planning?

Arranging your financial situation means making strategic changes to reduce your taxable income, such as adjusting your income sources, deductions, and tax-advantaged investments, to align with the tax laws.

Can I reduce my taxes without earning less income?

Yes, you can reduce your taxes without earning less income. The key is to strategically utilize tax deductions, credits, and tax-deferred investments to lower your taxable income.

What are some examples of tax deductions and credits that can help reduce taxes?

Examples include deductions for retirement contributions, medical expenses, and charitable donations. Tax credits and other incentives, such as tax-deferred investment accounts, can also help lower your overall tax liability.

How do businesses reduce their taxes through tax planning?

Businesses can reduce taxes by selecting the right business entity type, writing off business-related expenses like home office costs and meals, and utilizing tax-deferred accounts. Tax planning also involves making sure the business is compliant with deductions available under the tax law.

How much can tax planning potentially save a taxpayer?

Tax planning can save a significant amount. For example, one case in the video shows a tax plan that reduced a $62,000 tax bill to under $2,000, demonstrating the potential for substantial tax savings through strategic planning.