Strategic tax planning allows a business to analyze and arrange their financial situation in such a way that they can maximize their tax breaks and efficiently minimize their tax liabilities.
Tax rules and laws can be difficult to comprehend, but taking some time to learn and use them for your advantage can significantly change the amount of tax you pay and receive as tax refunds.
Let’s look at some innovative tax planning tips and strategies for beginners.
Understanding the tax bracket
The first and most important thing to understand is your federal tax bracket. The United States of America applies a progressive tax system which means the higher your taxable income is, the more taxes you pay. In other words, the tax rate progressively increases with your income. There are seven different tax brackets, where the minimum is a rate of 10%, and the maximum is 37% of your taxable income.
It doesn’t matter which tax bracket you’re in, you’ll not be paying the tax rate on your whole income because of 2 reasons:
- You have to minus tax deductions in order to find out your taxable income (for this reason, your taxable income isn’t always the same as the total income)
- You cannot just multiply your entire income by your tax bracket because government applies a tax rate on several chunks of your taxable income at a corresponding rate.
Understand the difference between tax credits and tax deductions
Tax credits and tax deductions are probably the best of the tax preparation process. Both help you reduce the tax bill, although in completely different ways. If you know the difference between the two, you can create some effective tax strategies to reduce the tax bill.
- Tax credits: Tax credit gives you a dollar-for-dollar deduction on the bill. For example, if your tax credit is valued at $2000, it will lower your text by $2000.
- Tax deductions: These are certain expenses that you or your business has incurred; you can minus them from the taxable income. They directly reduce the amount of income that is subject to tax.
Look out for tax credits and deductions
In the US, there are plenty of possible tax credits and deductions that you can avail if you fulfill the criteria. Some popular text credits and deductions include child tax credit, adoption credit, American opportunity credit, charitable contributions, etc.
Looking for tax planning strategies and smartly filing your taxes can be a time-consuming task. Nidhi Jain CPA offers tax planning services in San Francisco. Our certified public accountant in USA help you with business tax filing, back tax solutions, bookkeeping, and payroll services in Bay Area.
Call us or email us to learn more about our accounting services.