Why You need effective Tax Planning

What is tax planning? Tax planning is the analysis of your financial situation or plan to ensure that all factors work together to help you pay the lowest possible tax. Plans that minimize the payment of taxes are said to be tax-saving. Tax planning should be an integral part of a retail investor's financial planning. Reducing your tax burden and maximizing your ability to contribute to retirement savings is critical to your success. Key Findings Tax planning is the analysis of your financial situation or plan to ensure that all factors work together to pay the lowest possible tax. Tax planning considerations include timing of income, size, timing of purchases, and spending plans. A tax planning strategy can include contributions to his IRA savings and tax revenues and losses after retirement. To understand tax planning, several considerations are necessary. Considerations include planning for the timing of income, size and timing of purchases, and other expenses. Also, your choice of investment and retirement plan type should complement your tax return status and deductions to achieve the best possible outcome. Saving Strategies for Retirement Saving for retirement is a popular way to effectively reduce taxes.

Funding a traditional IRA allows you to minimize your total income by deposit amount. For 2022, applicants under the age of 50 who meet all eligibility criteria can contribute up to $6,000 to the IRA, and those over the age of 50 can make an additional $1,000 make-up contribution. 1 This figure will increase to $6,500 by 2023, while the catch-up contribution remains $1,000. 2 For example, if a 52-year-old man with an annual income of $50,000 makes a $7,000 contribution to a traditional IRA, and his adjusted gross income is $43,000, the $7,000 contribution will continue until retirement. It will be tax exempt.3 There are several other retirement plans available to help reduce your tax liability. 401(k) plans are popular with large companies with many employees. A plan participant can transfer income directly from her paycheck to her company's 401(k) plan. The main difference is that the contribution limit is much higher than the IRA. Using the same example as above, a 52-year-old male can put up to $27,000 in his 401(k) in 2022 (He's up to $28,000 in 2023). This is because in 2022, the salary contribution could be $20,500 for those under 50 ($22,500 in 2023) and $27,000 for those over 50 ($28,000 in 2022). An additional catch-up fee for contributions of $6,500. 1 Catch-up contributions for 2023 will increase to $7,500. 2 Tax Planning vs. Tax Gain / Loss Harvesting Tax gain / loss harvesting is another form of tax planning or management related to investments. It is useful because portfolio losses can be used to offset overall capital gains. According to the IRS, short and long-term capital losses must first be used to offset capital gains of the same type. In other words, long-term losses offset long-term gains before offsetting short-term gains. Short-term capital gains, or earnings from assets owned for less than one year, are taxed at ordinary income rates. 4 As of 2022, long-term capital gains are taxed as follows: 0% for taxpayers whose income is no more than $41,675 ($83,350 in the case of a joint return or widow(er), $55,800 in the case of an individual who is head of household, $41,675 in the case of any other individual) 15% tax for taxpayers whose income is between $41,676 and $459,750 ($517,200 in the case of a joint return or widow(er), $488,500 in the case of an individual who is the head of a household, or $459,750 in the case of any other individual) 20% tax for those whose income is higher than listed for the 15% tax 5 In 2023, long-term capital gain limits will be increased to the following: 0% for taxpayers whose income is no more than $44,625 ($89,250 in the case of a joint return or widow(er), $59,750 in the case of an individual who is head of household, $44,625 in the case of any other individual. 15% tax for taxpayers whose income is between $44,626 and $492,300 ($553,850 in the case of a joint return

or widow(er), $523,051 in the case of an individual who is the head of a household, or $492,301 in the case of any other individual)20% tax for those whose income is higher than that listed for the 15% tax 6 For example, if a single investor whose income was $100,000 had $10,000 in long-term capital gains, there would be a tax liability of $1,500