Tired of giving your hard-earned money to the IRS?

Customized tax planning can be a great way to cut your tax bill and maximize savings before the tax man shows up at your door. 

Here’s a look at what tax planning is, different types of tax strategies and the tax forms that’ll help you get money back before the April deadline. 

What does tax planning mean?

Tax planning is how you assess and prepare your financial situation to minimize your tax liability over the course of the year. An effective tax planning strategy helps reduce your taxable income, lower what you owe in federal income tax and maximize your potential for a refund at tax time. It may also help offset such future costs as healthcare expenses and preparing for retirement.

While tax laws can be complicated, getting to know what they are and understand how they benefit your unique financial situation ensures you’re paying the lowest amount possible when you file. Planning your finances from a tax perspective ensures each element is working together to your family’s long-term tax advantage. 

How do you do tax planning?

Proper tax planning means first knowing your income tax bracket and the potential tax liability you’ll face at the end of the year. Once you know your rate and filing status, you must then learn which tax credits, deductions and other tax breaks apply to your unique financial situation, what tax records you need to keep and other tax planning strategies that may help reduce your tax bill. 

Because the federal tax code and individual tax situations are so complex, your tax plan will likely include a number of unique tax elements, each of which must work together to minimize your tax burden. It’s important your tax planning software and services not only recognize every tax advantage available to you, but also provide what you need to maximize your tax efficiency across each area.

What are the different types of tax planning?

Tax planning strategies can look vastly different based on your age, circumstances and financial situation. 

Four basic types of tax planning include:

Federal income tax planning

Individual or family tax planning focuses on knowing what your household makes (income), how you file your return and which tax breaks will provide the most relief next April.

Depending on what you make and what you’re eligible for, you may have access to a variety of tax-saving opportunities, such as:

  • W4 allowances—These are based on how much you want withheld from every paycheck. 
  • Deductions—Student loan interest, charitable donations, college savings (529) contributions and HSA contributions may be used to lower your taxable income.
  • Credits—Popular credits like the Child Tax Credit, Earned Income Tax Credit, Lifetime Learning Credit and AOTC can help reduce your federal tax liability.

Of course, things are likely to change over the course of a year. When that happens, it’s essential to consult with your local tax pro on how to adjust your tax plan and ensure you remain in the best tax position possible. 

Retirement tax planning

Managing your taxes before and during retirement is key not only to limiting your tax liability once you’ve stopped working, but ensuring you have maximum control over your income and tax situation post-career and beyond. 

Effective tax planning during retirement involves knowing how best to shelter what you withdraw from your IRA or 401(k) and maximize your income. This can mean anything from taking full advantage of standard or itemized deductions and accelerating contributions to your IRA to deferring 401(k) plan distributions, using the Tax Credit for the Elderly, calculating Social Security benefits and knowing how much of your pension or annuity income is taxable. 

Your local tax pro can help you navigate the challenges of retirement tax planning and build a plan that fits your unique goals.

Estate tax planning

The IRS levies an estate tax on estates that exceed a certain assessed value. Because this value is relatively large ($11.4 million in 2019), most estates aren’t subject to federal estate tax and won’t need to worry about government taking a sizable chunk from inherited assets. 

For those who do face the prospect of inheritance tax, comprehensive estate tax planning can be a effective way to protect the value of their estate from federal taxes. Maximizing this value may involve any number of deductions, discounts and other tax advantages. 

It’s important to note that about a dozen states levy their own estate taxes, which impact estates at often significantly lower values than the federal threshold. Learn the different estate tax minimums here. 

Small business tax planning

If you’re a business owner, self-employed or both, you face a unique set of challenges when it comes to paying federal taxes, making small business tax planning a critical, if not essential part of your overall business strategy. 

Luckily, there’s a variety of deductions available to beef up your small business tax plan and reduce your income tax burden, including:

  • Home office
  • Vehicle costs, including mileage, gas and repairs
  • Wages and salaries 
  • Professional service costs (legal, accounting or consulting fees)
  • Employee and client entertainment
  • Office equipment
  • Utilities, such as internet, electricity and phone
  • Rent payments
  • Loan interest
  • Travel expenses
  • And more

What forms do I need to do my taxes?

The forms needed to prepare an effective tax planning strategy depend on the type of income and tax situation you’re working from. Selecting the right forms provides the basis for your tax plan calculator, allowing you to identify and add up the deductions, credits and other advantages you’ll need to reduce your federal income taxes effectively.

Critical tax forms often needed in tax planning:

1040 tax form

1040 tax forms are standard taxpayer income tax forms needed to file your tax return at tax time.

1099 tax form 

The 1099-Misc or self-employment tax form is commonly used by independent contractors to report certain types of payment or income to the IRS. 

K1 tax form

A Schedule K-1 tax form (Form 1065) allows you to report your share of any investment earnings, losses, credits and deductions within partnership interests. 

W4 tax form

Your W4 allowance form provides your employer info on how much federal income tax to withhold from your pay.

Tax extension form

Form 4868 is the commonly used form for requesting an extension of time on filing your federal income tax return. 

I 9 tax form

Employers are required to have each employee fill out an I9 tax form prior to employment. I9s are used to verify employee identity. 

W9 tax form

If you own a small business, the W9 tax form used to request taxpayer ID numbers and legal info from any independent contractors you hire.

Form 1040-ES

The 1040-ES worksheet is for calculating any estimated tax payments you need to make on taxable income during the tax year. 

There’s a lot to think about when it comes to planning your taxes and saving the most money. To be sure you don’t miss anything, talk to your local Liberty Tax® pro today.

Get the latest on #taxplanning on our Facebook and Twitter