Learning the principles of tax planning can keep you ahead in terms of reducing your tax liability. Some of the wealthiest people have been able to maintain their wealth by managing Uncle Sam – there are many lessons that can be learnt from them:
Tax avoidance Vs Tax evasion
Tax avoidance is legal – creating income streams that have no tax liability or reduced tax liability is tax avoidance. Also deferring tax liability can also be considered tax avoidance. Not declaring tax income and not paying taxes properly on time is considered tax evasion and is illegal. The principle here is to use tax avoidance measures to reduce your tax liability and not use evasion tactics that could lead to imprisonment and serious fines.
One of the best ways of reducing tax liability is staying ahead and preparing for the inevitable by preparing tax returns in advance to check what the payment will be like and then budgeting for it. Having the return prepared will also give you an idea where your liability rests and will give you the opportunity to restate your income sources so as to reduce liability. Contact your financial advisor or tax advisor and ask in advance for income sources that are exempt or that have lower percentage of tax. Also have a list of deductible expenses and go through all the invoices and receipts to see if tax deductions can be claimed on them. You need to prepare a list of tax deductible expenses early as you might need additional documentation to claim it.
There are many different tax authorities Federal, State and local tax authorities and many different forms of tax income tax, sales tax, property tax, estate tax and wealth tax – it can be easy to get confused with these and not pay your tax or sometimes pay to the wrong authorities. So ensure that your understanding of the tax system is clear and all the account numbers have been filled up correctly and the returns are submitted to the correct authorities. Getting the help of a tax advisor might be a good move if you feel that the whole process is overwhelming.
Definitely implement a no surprises policy when it comes to your tax – read up on recent changes to tax regulations and be ready to make any additional payments – also sometimes funding might be a problem and an overdraft facility might have to be arranged to make payments on time.
If you’re one of the unfortunate few you might be audited and it pays to be ready with all the documentation. So prepare an index and summary for your income tax return and this will help beat the audit and ensure that you have copies of documents with you – as sometimes they get lost in the bureaucracy and make sure that officials sign for all the documents that they are taking over to their offices.