Tax Planning for Individuals & Small Businesses Plus 3 Tips to Save on Taxes Right Now

Tax planning is always important for individuals and businesses, it is possibly more important than ever before this year. There are hundreds of rules, laws, and techniques to delve into regarding tax law and incentives. Let’s start with the basics – what is tax planning? Essentially, it’s the financial assessment and arrangement of an individual and/or business to capitalize on tax savings and minimize tax liabilities. Tax laws are increasingly complicated, so we advise consulting a tax advisor for questions or concerns for the tax year.

Tax Planning for Individuals

Each individual’s financial/tax situation is different, so tax preparation and planning will be unique for everyone. To start, you need to understand which federal tax bracket you fall into, and how that will affect your taxes. The U.S. has a progressive tax system that favors lower income and gradually ramps up tax rates for higher income. Additionally, your income is not entirely taxed using your income bracket’s rate. Rather, portions of your income are taxed at each progressive rate (10%, 12%, 22%, 24%, 32%, etc.) until your taxable income runs out. For instance, your first $9,875 is taxed at 10%, then the next portion of your taxable income from $9,876 to $40,125 is taxed at 12%, and so on. At Watkins & Company, we use various strategies to reduce your taxable income. Meeting tax planning goals throughout the year will eliminate any tax surprises when it’s time to file.

For individuals, many of these strategies include identifying deductions and possible tax credits to target during the year that are in line with your financial situation. There is a wide variety of available credits and deductions for filers who qualify – Adoption credits, education credits, child care credits, energy efficient credits, and countless more. Tax planning helps us get a good idea of your tax situation, so we can identify every area of tax relief possible. From there, we communicate with you to take action and capitalize on tax savings opportunities throughout the year.

Tax Planning For Businesses

Like individuals, businesses all have very different tax situations based on numerous factors. The tax preparation and planning may be different, but the end goal is the same. The goal is to reduce taxes owed and capitalize on tax relief available. A tax advisor will help you see the big picture and suggest certain decisions and actions during the year to improve your tax situation. It is imperative to establish a tax projection based on estimated income and deduction amounts. From there, business owners have more control and freedom to run their business without having to worry about a large looming tax liability in the following year. Businesses and individuals pay estimated tax payments based on these numbers to dodge penalties and stay on top of taxes.

Due to the events and effects of COVID-19, certain tax laws and relief have been set up for businesses in the United States. Some business owners may qualify to claim a COVID-19 related disaster on the previous year’s tax return – which could result in an instant refund. Tax planning helps identify these areas of tax relief, so you can get the most out of your tax savings.

3 Tax Savings Tips to Take Advantage of Right Now

Many filers lost the ability to claim the itemized deduction with the most recent, large-scale tax law change. Because of this, the incentive for charitable contributions greatly decreased. For taxpayers who will not itemize, the CARES Act allows for an above-the-line income deduction up to $300 for CASH charitable contributions. This does not include, non-cash donations, so donate while you can!

There are only a couple months left in the year, however, this next tip could save you from underpaying taxes. If you are expecting to fall short, you can always sharply increase your tax withholding on your W-4 for the remainder of the year including on income from year-end bonuses.

Did you buy depreciable equipment or plan to by the end of 2022? You have the option to take 100% bonus depreciation on this equipment rather than depreciate it over the years. This may be helpful to many businesses who had to entirely reconfigure their place of business to be up to social distancing standards. These very costly changes are also available for 100% bonus depreciation.

These few tips only scratch the surface of available relief, and often, taxpayers completely miss out on opportunities to save tax that would otherwise be discovered through tax planning with professionals. Watkins & Company is dedicated to looking at the full picture of your tax and financial situation, so we can ensure tax planning will return the best possible outcome for your taxes.