Nowadays, paying taxes isn’t a voluntary requirement but rather a mandatory contribution. However, like you wouldn’t want to spend any more than you have to on other necessities, such as housing, you certainly don’t want to overspend on taxes too. Otherwise, you can expect to pay penalties if you didn’t file your taxes or become subject to criminal prosecution.
The key to minimizing your tax bill is to educate yourself on the subject. Tax rules can seem complicated, but taking time to understand them helps you change how much you end up paying when filing taxes and shrink your tax bill.
Also, suppose you’re a first-time taxpayer. In that case, you may struggle to understand the main concepts and areas such as tax deductions, liabilities, and available financial strategies for protecting your assets, as well as saving for the future. The need for these strategies is more significant regarding the tax code’s complexity.
What Exactly Is Tax Planning?
Tax planning includes analyzing and arranging an individual’s financial situation to maximize tax breaks and efficiently minimize tax liabilities. Many tax planning strategies aim to help individuals and small business owners and companies file their taxes and reduce total capital outflow.
Don’t worry about losing your time because the time spent devising tax planning strategies may help you find benefits even beyond tax savings.
Why Is Tax Planning So Important
Even though everyone’s tax situation is different, most taxpayers can take specific steps to lower their taxable income. Also, these strategies help taxpayers get the most from the tax deductions, keep the financial documents organized, avoid paying penalties, and plan for retirement.
This article explains basic tax strategy concepts and provides you with necessary tax advice before making your next financial move. Learn how to implement the best tax planning strategy for your specific financial situation. We will cover:
- Income tax brackets for 2022
- Tax planning strategies for individuals
- Small business tax planning strategies
- Gain financial independence with Infinite Banking
Taxation Planning Means Understanding Your Brackets
We can say that tax planning strategies are all about thinking ahead. You should already start thinking about how to handle your 2022 finances in a tax-efficient way, as the federal income tax brackets for the 2022 tax year are available.
Income Tax Brackets for 2022
The tax rates for 2022 haven’t changed, they’re still set at 10%, 12%, 22%, 24%, 32%, 35%, and 37%, but the tax brackets are adjusted every year due to inflation.
The tax rates are applied only to the income that falls within the applicable tax bracket range for your particular filing status. Your tax bracket is determined by your tax filing status, which is based on your marital status, whether you have children or other dependents, your occupation, and some other factors.
Be aware you must file your status honestly; otherwise, it may be considered fraudulent, and you may be charged with penalties. Every taxpayer falls within one of the following filing categories, established by the tax law:
- married filing jointly
- married filing separately
- head of household
- qualifying widow or widower
Remember that you can only choose one filing status on your annual tax return as a taxpayer, but that doesn’t mean you can’t change it from year to year.
For example, if your filing status is married filing jointly and your taxable income is $100,000, your tax bracket is 22%.
However, this doesn’t mean that this rate gets applied to your total taxable income, which would mean paying about $22,000 in taxes. Thanks to marginal tax rates, you will be required to pay the first $20,550 of your taxable income at the 10% rate, the next $63,000 of your payment at the 12% rate, and finally, the last part of your income, last $16,450, gets taxed at the 22% rate.
When we do the math, you will end up paying $2,055 in taxes on the first portion, $7,560 on the second portion, and $3,619 on the last part of total taxable income. In summary, your total tax bill will be $13,234 instead of paying $22,000 in tax if the flat 22% rate is applied.
Tax Planning Strategies for Individuals
Each year as a US resident, you are obliged to pay income taxes at the federal, state, and local level, as well as additional pay levies such as Social Security and Medicare. Although taxes are difficult to avoid, there are various strategies out there that can help lower your tax burden and protect your hard-earned money.
Strategies to Reduce Your Income Taxes
Invest in Municipal Bonds
One way to reduce your tax obligations is buying a municipal bond, as interest on these bonds is exempt from federal taxes. When you buy one, you essentially are lending money to your local government or state entity for a particular set number of interest payments over a predetermined period.
When your bond reaches the maturity date, the total amount of your original investment will be repaid. As these municipal bonds payments are tax-free interest payments, they are appealing tax plans to some investors, especially for those having higher taxes. The downside to this strategy is that these bonds generally have low-interest rates.
Offset Capital Gains
If you are interested in investing, one of the additional benefits of investing in mutual funds, bonds, stocks, and real estate is getting favorable tax treatments for long-term capital gains.
As an investor holding a particular capital asset for more than one year, you can enjoy a tax rate of 0%, 15%, or 20% on the capital gain, depending on your income level.
For example, in 2021, a married couple filing would pay 0% on the long-term capital gains if their taxable income is below $80,800. The threshold for single filers was set below $40,400.
In the 2022 tax year, the 0% tax rate bracket for long-term capital gains will be applied to the income of up to $83,350 for married filing jointly and $41,675 for single filers.
However, it is crucial to understand the differences between long-term versus short-term capital gains rates. If you had the asset for less than a year before selling it, expect to pay capital gains tax rate at ordinary income rates.
Please make sure you remember that in case of long-term losses, they can offset your ordinary income only up to $3,000 when you have no more capital gains to absorb these losses. Also, “tax-loss harvesting” allows you to pick investments to sell at losses before the end of the tax year to offset your gains elsewhere.
Claim Tax Deductions and Credits
When preparing your tax return, you have an option to reduce your tax bill by claiming tax deductions or tax credits. The IRS offers various tax credits that help you reduce taxes. A tax credit is a great money-saving strategy, allowing taxpayers to claim a dollar for dollar reduction by subtracting an amount of money from your tax due. Perhaps the most popular refundable tax credit option is the Earned income tax credit. It is best suitable for low to moderate-income individuals who earn an income through an employer or are self-employed, meeting set criteria based on annual income and number of family members.
For example, in the 2021 tax year, a low-income earning taxpayer with three or more qualifying children could claim credits up to $6,728, up to $5,980 with two children, up to $3,618 with one child, and up to $543 if none. In 2022, the credit will rise to $6,935 for parents with three or more kids, $6,164 with two, $3,733 with one, and $560 with none.
Another popular refundable credit option is the Premium tax credit. It is designed to help individuals and families cover their health insurance premiums.
The new tax break, American Rescue Plan, was signed on March 11, 2021, by president J. Biden.
The Biden tax plan proposed tax changes that benefit low and moderate-income individuals. For 2021 only, the Biden tax plan increased the size of the earned-income tax credit for households without children. The maximum credit amount for childless families was increased from $543 to $1,502.
Furthermore, the age range for claiming a credit was expanded from 25 to 19 for individuals without children. Also, the Biden tax plan eliminated the upper age limit, which used to be 65.
The Biden tax plan also updated the child tax credit. In 2021, the filers could claim as much as $3,000 per child and $3,600 for children under five. In addition, the age limit for qualifying children rose to 17, and the credit became fully refundable.
Max Out Retirement Accounts and Available Employee Benefits
If you’re looking for tax breaks, you should consider contributing to retirement accounts. Suppose you have a 401(k) or 403 (b) retirement plan; you can expect your taxable income to be reduced for contributions up to $20,500. Individuals aged 50 or older can add $6,500 to their primary retirement plan contribution.
If you don’t already have a retirement plan at work, you can always contribute to a traditional IRA retirement account and get a tax deduction up to $6,000, or $7,000 if you’re 50 and older,
These deductions for IRA contributions are based on an individual’s adjusted gross income and whether it’s claimed on a single taxpayer’s return, married filing jointly, married filing separately.
When filing tax returns, many employees get an option to exclude some benefits received from their income. These benefits are flexible spending accounts, transportation cost reimbursements, educational assistance programs, adoption expense reimbursements, group-term life insurance up to $50,000, etc. Subsequently, these employee benefits are reflected as non-taxed amounts declared on employees’ W-2 statements.
Open a Health Savings Account (HSA)
Another money-saving strategy for employees with a high-deductible health insurance plan is a health savings account (HSA). HSA contributions are generally direct contributions and are considered 100% tax deductibles. In 2022, the maximum deductible contribution level is up to $3,650 for individuals and $7,300 for families. The primary purpose of health savings accounts is funding for your health insurance with pre-tax money, and a bonus benefit is that when these funds are used for medical bills, the withdrawals won’t be taxed either.
Small Business Tax Planning Strategies
When you’re starting your business, you may not think tax planning is at the top of the list of priorities. Nonetheless, it’s wise to think of tax planning strategies ahead, as if your new business company doesn’t meet the required tax obligations, you’re set for failure.
You must know your new businesses can be subject to different taxes as a business owner. These are the required taxes:
- income taxes
- employment taxes.
- sales taxes
- excise taxes
Most businesses have to file state income taxes along with federal income tax. These taxes apply to C corporations, partnerships, limited liability companies, sole proprietorships, and S corporations.
Also, every business that hires employees has to pay employment taxes. The employers must withhold income taxes and the employees’ share of Medicare and Social Security (FICA) taxes.
All the services and goods sold in a state that applies sales taxes must be taxed. Every business is obliged to collect sales tax from each customer’s transaction, or they would have to pay hefty penalties.
Excise taxes are another form of taxes that has to be paid by some businesses for their use of fuel, highways, or other similar activities.
If you want to keep more money in your pocket, consider:
- business property deductions
- tracking income and expenses
- making contributions to retirement plans
- restructuring Your Business
Business Property Deduction
Business property deduction is a tax deduction for businesses that either pay rent for their working properties or pay expenses for the use of the home for home-based businesses. The costs paid for renting a business property may be deducted, along with a percentage of mortgage interest, utilities, insurance, repairs, and depreciation.
Also, business use of a privately owned vehicle can similarly allow deduction of vehicle’s expenses on the business’s annual tax return. The mileage must be attributed to business use when qualifying for vehicle deduction.
Tracking Income and Expenses
As a self-employed or a business owner, you have to keep tax records for tax purposes. Critical tax records are the following:
- Employment taxes; usually have to be kept for four years, as mentioned in IRS Publication 15
- Gross receipts: including cash register tapes, deposit information, invoices, receipt books, and Form 1099-MISC entries
- Transportation, entertainment, travel, and gifts; which must be substantiated under particular guidelines explained in IRS Publication 463
- Assets; keep information about the business property, price, date of purchase, cost of improvements, taken deductions, etc.
- Purchases and expenses, including canceled checks and other proofs of payment (cash register tape receipts, credit card receipts, statements, invoices, etc.)
Contributing to a Retirement Plan
As a small business owner, you may contribute to retirement plans for yourselves or your employees. According to the IRS, retirement contributions are deducted from taxable income. The basic principles of retirement savings:
- The money you’re saving now will grow tax-free.
- Retirement plans offer different options for when and how businesses contribute.
- Starting retirement savings accounts brings additional benefits to businesses, such as qualifying for credits covering some startup costs.
- Retirement plans will help employers retain qualified employees and attract new ones.
According to the IRS, typical retirement planning plans are a Simplified employee pension plan (SEP), Roth IRA, and other retirement plans, depending on your particular financial goals and number of employees.
Restructuring Your Business
Running a business requires constant maintenance. However, some maintenance costs can be deducted as business expenses, such as changing the lighting or plumbing repair. Unfortunately, the IRS requires you to pay a one-time restructuring charge when you reconstruct your businesses. These are the scenarios like relocating, downsizing, consolidating debt, etc.
Gain Financial Independence With Infinite Banking
Let us tell you why we think the Infinite Banking Concept is a great way to ensure your financial freedom. The Infinite Banking Concept utilizes the advantages of specific life insurance policies. Use the money that’s deposited in your policy’s cash value to help pay off debts, make investments, or provide a legacy for your family; meanwhile, your policy is still growing at the guaranteed 4% compounded interest rate.
The Infinite Banking Concept
The Infinite Banking Concept focuses on imitating how a traditional bank operates without needing to depend on a third party anymore.
Infinite Banking allows you to create an endless banking system and, in a sense, become your own bank.
With the use of the Infinite Banking strategy and a Whole life insurance policy combined, you can build your wealth by borrowing and repaying the money held in your permanent life insurance policy’s cash value account. Thus, you will be able to dictate the cash flow single-handedly and earn dividends, although you are using that money elsewhere.
Key Steps for Implementing Infinite Banking
To build your wealth with Infinite Banking, you have to make sure you’re following three crucial steps. Infinite Banking requires:
- Overfunding (with after-tax funds) a high cash value whole life policy from a life insurance company.
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life policy.
- Tax-Free Loans taken out against your Whole Life Insurance policy’s cash value to use for your financial expenses.
The goal is to follow these three steps and duplicate the Infinite Banking process as much as possible to build significant value for your own bank. Thus, you can finally forget about banking fees and high-interest rates on loans and gain true financial freedom for you and your family. Regardless of your financial objectives and unique goals, implementing the Infinite Banking strategy will help you reach them.
We hope this article has helped you figure out how to successfully work within the tax system and reduce your tax bill now. We suggest talking to your tax advisor if you need specific individualized tax advice.