Fundamentals of Creating A Strategic Tax Payment Plan

Did you know that the lowest rate of income tax in the US is 10%, while the highest is 37%? Business tax rates also come with huge differences, and in these financially turbulent times, all savings can be a lifeline to a business. So how do you save money on taxes?

One way is by preparing in advance. Read on as we tell you how to plan your taxes and discuss a tax payment plan. 

What Is Tax Planning?

Tax planning is a financial plan created from the perspective of maximizing tax benefits and deductions. It involves looking at how specific procedures in your company relate to tax and how to deal with them in the most financially rewarding way before the year ends. Tax is exceptionally complicated, and many businesses do not realize how much they can save once they understand and prepare for it accordingly. 

What Are the Benefits of Tax Planning?

Every business can benefit from improved cash flow, and when you prepare for taxes, this is one of the main advantages. You don’t have sudden payments to make at times when the business may be having downtimes. Paying less in tax also contributes to an increase in profit you can use elsewhere in the business. 

Know Your Tax Bracket

The first step is to know what federal tax bracket you are in. In the US, the more you earn, the more you get taxed according to a series of thresholds. Your tax can range from 10% of your income to 37%. 

However, the amount you get taxed comes after deductions have been taken off. It is also not taken as a total sum but is divided into certain categories. This means you are unlikely to be taxed on the whole amount you earn. 

Stick With An Accounting Plan

There are a few ways you can begin accounting. If you mix and match them, it will get confusing and impact your tax planning. Choose one method and make sure you stick with it.

The two main methods are cash and accrual. Accrual is the method by which you report funds when you have completed a project, which is not necessarily when you receive the payment. It may take months for a client to clear a bill. 

The cash basis is when you report payments as soon as they are received. Both are important as they will impact how you can schedule tax payments. You will also be charged if you decide to switch between them year after year. 

Keep the Right Records

If the IRS decides to audit your taxes, you need to have all of your records in order. They can do this within three years of any tax year, so make sure you hold your records that long. You should also know what tax records you need to keep. 

Any W999 forms, brokerage statements, W-2 forms, and alimony forms should be kept for your income records. From expenses and deductibles, keep any receipts, invoices, and statements of charitable donations. 

All property records should remain, such as purchase and sales invoices, insurance records, and statements. Any retirement account forms and statements from other investments should also be calculated. 

Understand Deductions

Deductions are very important in planning your tax and reducing the amount paid. You may have items that you are not even claiming for, which can seriously reduce your bill. These can be maximized during your day-to-day operations. 

Deductions and Credits

There is a fundamental difference between deductions and credits. Deductions work by taking sums of money off your taxable income. This means the value you are taxed upon is lower, so you pay less tax. 

Credits work toward paying your tax bill. For example, if you had $500 in tax credit, you can use this like cash to pay a sum off your tax bill, meaning a lesser amount has to come from your own pocket. 

The types of deductions and credits available to you are quite vast. They can range from college education costs to credits for buying energy-efficient products. One of the benefits of hiring someone for tax advising is that they will be up to date on current offers. 

Tax Payment Plan

A tax payment plan is an agreement with the IRS. It allows you to pay taxes owed within a given timeframe. There are short-term payment plans and longer ones, the latter of which will incur a fee.

Payment plans would only be applied for if you are unable to pay your taxes in full within the given timeframe. While the application is pending, the IRS is not able to collect money from you or add any levies to the money owed.

The plan you are eligible for depends on your tax status. Short-term payment plans are available to anyone who owes less than $100,000 in tax. Long-term payment plans are for those who owe less than $50,000 in tax.

These should only come into effect if you have not planned your taxes wisely and are unable to pay. The IRS can also reject applications, so they should only be a last resort. Getting assistance with effective tax planning strategies should help you avoid this situation.  

Starting to Plan

Now you know how to plan taxes and apply for a tax payment plan, you can begin to lower your bill. Add these tips to everything you do throughout your accounting quarters. You should soon start to reap the benefits in the next financial year. 

Bennet Financials work hard to make sure you keep more of your money. From bookkeeping to tax planning, we specialize in service-based businesses earning over 250k annually. Visit us here to book a free, no-obligation consultation.