Tax planning or tax-effective investing is a way of structuring your finances to reduce your tax liability and make some savings on tax. Tax planning can benefit both individuals and companies when it is carried out within the confines of the stipulated tax law. There are three basic ways you can plan your finances to minimise your tax burden; read on to discover these ways:
Taxable Income (ATI).
One of the critical elements used to determine the amount you owe in tax is your Adjusted Taxable Income (ATI). Various tax credits and tax rates are usually dependent on your ATI. Even mortgage lenders and banks will often ask for an individual's ATI before making any lending commitment with them—hence, the importance of Adjusted Taxable Income.
Given the importance of the ATI, your tax planning should probably start by defining your ATI. Your Adjustable Taxable Income is the calculation of all your income minus the adjustments you can make to your income. For instance, if you pay for a retirement plan, then this subsequently reduces your wages, thus lowering your taxable income: This means you can reduce or deduct your retirement plan payments from your overall income. Other adjustments you can make on your taxable income include superannuation contributions, child support payments and spousal maintenance payments.
Increase your tax deductions
Another tax planning strategy is to take advantage of tax deductions. Once you have calculated your ATI (having made the necessary tax adjustments), you will be left with taxable income. You can now make a standard deduction or an itemized deduction on your taxable income. For instance, you can deduct the expenses used for health care, mortgage interest and state taxes.
If you want to utilize deductions fully, you should consider making an itemised list of all your annual expenses in a spreadsheet. This will help you compare your standard deduction versus your itemised expense deduction. Two of the biggest tax deductions you can take advantage of are on state taxes and mortgage interest.
Utilize Tax Credits
Taking advantage of tax credits and tax incentives can reduce your tax. For instance, you might be eligible for a tax credit if you pay medical expenses relating to disability aids or aged care. You can also get tax credits for child care benefits and spouse maintenance.
Tax planning can be difficult to comprehend, especially if you have little financial knowledge. It is, therefore, wise to seek the services of a reputable tax accountant to help you safely implement the above mentioned tax-effective investing strategies.