Posted by Abundant Wealth Planning LLC

An Insight into Tax Planning

An Insight into Tax Planning

We define tax planning as the process of analyzing a financial situation to make sure that you engage every essential and lawful element to make it possible to pay the minimum tax possible. You have a tax-efficient plan if it reduces what you eventually pay as taxes. 

Tax planning is a vital part of the financial plan of every individual and investor. This boils around your ability to reduce tax liability and increase the chances of contributing more to retirement accounts. 

Working principle of Tax planning 

There are many considerations that tax planning covers. A few examples are the timing of your income, the time you made purchases, size of your income, alongside planning for miscellaneous expenditure. The investment you will select alongside the retirement plan types must support the status of tax filing alongside the deductions to bring about the best result.

Tax Planning in Compensation for Retirement 

One of the legal and most efficient ways to reduce taxes efficiently is saving through a retirement plan. With this, one can reduce gross income by every value contributed for 2021 and 2020. A filer with 50 years of age can contribute up to $6000 to their retirement account provided other qualifications are met. As an example, a 53-year-old woman who has an annual income placed at $53,000 and made an $8,000 contribution into their traditional IRA, the AGI will be $45,000 while the $8,000 will only be taxed during withdrawal at retirement period.

There are a series of retirement plans with which an individual might reduce their tax liability. For instance, many companies use 401(k) plans in which interested employees can directly specify funds from their paycheck directly into the 401(k) account designated for the company. 

Using a similar illustration, a 53-year woman can contribute as much as $26,000 to their 401(k) plan. For 2021 and 2020, they might contribute up to 19,500 USD if below age 50, and if at 50 or above, they might contribute $26,000. The 401(k) brings down the AGI from $53,000 to 27,000 USD.

Tax Gain-Loss Harvesting 

Another approach to tax planning that has to do with investment is tax gain loss harvesting. One can use it as it enables one to offset the entire capital gain using the portfolio losses. Uncle Sam specifies that one must first use long and short-term capital gains in offsetting similar capital gains. 

This means that losses that are long-term will only offset gains that are long-term before applying them to offsetting gains that are short-term. Short-term earnings or profits from the asset owned for not up to a year are taxed at the higher ordinary income rates. 

Here are the taxes for capital gains long term as of 2020:

  • Taxpayers with income below $78,750 have 0%

  • Taxpayers that are single with income within the range of $78,750 and $434,550 have it at 15%. The upper limit for married couples with joint filing and widows that qualify is $448,850; the head of household is $461,700 and $244,425 for married couples with separate filing. 

  • For people with income higher than the previous bracket, they will be subjected to 20% tax



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