Category: Accounting

The Importance of Tax Planning

Many people use the term “tax planning,” but it is often misunderstood. It is the art of learning how to manage your affairs in ways that postpone or avoid taxes. Skilled tax planning means more money to save and invest, and it can make the tax season more of a financial boost instead of a financial burden. As explained well by Wealth Plan: “tax planning means either deferring or avoiding taxes by taking full advantage of the beneficial tax-law provisions, increasing tax deductions and tax credits, and by making good use of all applicable breaks that are available under the Internal Revenue Code.”

Strategies are typically designed and employed to achieve goals–a series of steps undertaken to accomplish an intended end. Of course, strategies within the realm of tax planning are undertaken to achieve financial goals primarily, but they are also employed to achieve business goals. If your tax planning strategies are effective, they should successfully accomplish, or at least address, the following goals:

1. Lower your amount of taxable income
2. Reduce the rate at which you are taxed
3. Empower you to control when taxes get paid
4. Ensure you get all credits available to you
5. Put you in charge of the Alternate Minimum Tax

Note the following sample of strategies intended to reduce one’s tax liability, as noted by Cash Cow:

• Maximize Retirement Contributions: Deferral of taxation is one of the most common and useful tax strategies for individuals who are currently in a high tax bracket, but if you follow this path anticipate being in a lower tax bracket at some point in the future when withdrawals (distributions) are taken.
• Harvest Investment Losses: You can offset unlimited investment gains, and up to $3,000 of ordinary income each year by selling your investments that have lost value. If your losses exceed your gains and the $3,000 of ordinary income, you can carry them over to be used in future tax years.
• Consider Charitable Gifts: This strategy is only useful if you can itemize your tax deductions (most often due to mortgage interest deductions), and plan on making donations. Appreciated assets are some of the most tax-efficient charitable donations. Donating these assets will allow you to avoid paying capital gains on the appreciation.
• Invest In Municipal Bonds: Some high income earners are now subject to the 3.8% Medicare surtax on all investment income. Municipal bonds avoid this additional tax, and typically avoid all Federal and State income taxes. That means the tax equivalent yield (the yield an investor would require from a taxable bond) has increased for those taxpayers, making muni-bonds more attractive.

 

Types of Tax Planning and Management

Now that you’ve seen what is tax planning, and the difference between tax planning and management, let’s understand the types. There are essentially four methods here’s a summary of each.

Short Range Tax Planning:

This type of tax planning has a limited objective or aim. Investors will often rush to invest toward the end of the financial year. This usually happens when there is a change in the taxpayer’s financial situation. For example, you get a promotion and a raise during a financial year. Your salary structure will obviously not be the same as the previous year. You realise, your taxable income is now higher. So, 3 to 6 months before your taxes are due, you look for investment options. These can be found mostly under section 80C. You’ll be requested to submit income tax proofs, if you have chosen any compliant financial product, to save tax, under this section.

Long Range Tax Planning:

In this method, you’re essentially taking calculated tax saving decisions, at the beginning of a financial year. The aim is to reduce tax liability for the long-term. For example, taking a home loan, or, an education loan. Another way to reduce your tax liability is, by transferring shares, or assets with family. If their taxable income is lower than yours, they can be eligible for tax benefits.

Permissive Tax Planning:

Through this method, you’re optimising each and every section of the Income Tax Act of India—1961. You need to be within the legal framework of compliance. Utilising all the sections legally, doesn’t mean you’re avoiding taxes. It simply means, you’re being smart about reducing your tax liability.

Purposive Tax Planning:

Here, you’re planning you have a specific purpose to save taxes. This method needs a detailed evaluation of investment options, assets, etc. At times, it may even require a complete restructuring of your personal finances, to reduce your tax liability.

 

How to get started?

Anyone can start planning their taxes in a few simple steps:

1. Start by taking your total income into account. This is the starting point of the process and requires you to accurately assess your annual and monthly income.
2. Evaluate the taxable aspects of your income. Housing and rent allowances included in the salary on top of base pay are not taxable. However, profits made from investments could add to taxable income. Therefore, understanding one’s taxable income is a requisite to be able to plan taxes.
3. Make use of deductions to reduce the total taxable income. This can be done by structuring salary and proper planning of investments. For example, interest from a fixed deposit is taxed at the same rate as income tax, while a debt fund held over e years is taxed at 20%. So if you fall in the 30% tax bracket against the taxable income of 10 lakhs and above, debt funds are a more tax-friendly option.
4. Invest in tax-saving instruments. There exists a wide range of deductions available to eligible taxpayers in Sections 80C through 80U of the Income Tax Act, 1961. Other options such as deductions and tax credits are listed under the Income Tax Act, 1961. Investment options include Provident Public Fund (PPF), Equity Linked Saving Schemes (ELSS) in mutual funds, National Saving Certificates (NSC) or 5-year bank deposits. Life insurance, health insurance premium and home loan payments can let you avail tax savings.

 

You Need to Consider the Importance of Tax Planning

If you’re reading this and fall into the crowd that hasn’t been considering their taxes in retirement because you were unaware, you’re now aware! If you aren’t confident about what you need to do next, keep reading. The first thing you need to do if you haven’t looked into the importance of tax planning in retirement is to find a trusted professional to help you. Many of you may already have a financial advisor and a CPA. That’s great! However, are they working together to make sure your accounts get utilized in the most tax-efficient manner? If not, maybe they need to be in contact.

You see, most CPAs don’t have the luxury of working directly with the individual planning someone’s retirement and investment plans. Though allowing the two to work together to build a plan that best manages your account over time considering the tax impact year over year is extremely advantageous.

Many Factors Involved in Tax Planning for Retirement

Tax planning in retirement carries more importance when you consider just how many factors impact your taxes.

• Social Security – “But wait, that’s tax-free, right?” Not always.
• Required Minimum Distributions – “We don’t have them in 2020, who cares.” You should be looking much further down the road than just 2020.
• Charitable Giving like Qualified Charitable Distributions – “Why can’t I just give money straight to a charity? Why complicate it?” You could be saving yourself in taxes, that’s why!
• Roth Conversions– They aren’t for everyone, but they may be right for you!

 

Investment Avenues for Tax Saving

Under Section 80 C one can invest in PPF, NSC, Bank FDs, Life Insurance & ELSS are various investment instruments eligible for tax saving. Amongst them ELSS enjoys the shortest lock – in period of 3 Years. Also Equity Linked Saving Schemes (ELSS) allows one to benefit from the long term growth potential of equities and offers the facility to invest the amount systematically: Systematic Investment Plan (SIP)

Systematic Investment Plan (SIP): A Smart Way to Save Taxes too!

• SIP is a strategy whereby an investor commits to invest a fixed amount at specified intervals.
• SIP allows one to achieve tax saving in a systematic & hassle free manner: As a fixed amount gets invested automatically each month, the investor does not have to worry about making hasty last-minute lumpsum investments for saving tax.
• Law of Averaging at work – Rupee Cost Averaging at its best: investing the same amount on a regular basis will lead to one getting more units when price is low and one getting less units in case price is high.
• Small Ticket Sizes do not impact the wallet too!
• Focus on consistent & continuous investments – Fixed Money for Fixed Period of time to benefit from market volatility.
• Imparts Discipline in investing – The most needed quality for a long term investor.
• Each SIP would attract a 3 year lock-in period.

Inheritance tax planning and tax-free gifts

Find out how to give away money from your estate to reduce your inheritance tax bill, and what is a ‘potentially exempt transfer’

Can I give money away to avoid inheritance tax? If you’re estate is worth more than $325,000 (or $650,000 for married couples and civil partners), it’s likely some of it will pass to HMRC in inheritance tax when you pass away.

One of the most straightforward ways to make sure tax isn’t charged unnecessarily is to consider giving away assets while you are still alive. You’re allowed to make some gifts without any tax being due after your death. These usually include gifts to your spouse or civil partner, or if you’d like to leave money to a charity. Most of the time it also includes gifts to individuals made more than seven years before your death.

Gifts to your family or other individuals If you wish to leave money to other family members, such as your children, it’s a good idea to plan how you want to do this.

Gifts that benefit you You can’t gift someone something that you will still maintain a benefit from in your lifetime and benefit from the gifting rules.

 

Tax-efficient accounts and investing methods to help make you a smarter tax planner

Preparing for tax time

Organizing your tax information early may help you lessen your tax-season stress.

Tax-efficient investing

Tax rules and rates may change, but it’s always a good idea to keep taxes in mind when making investment decisions.

Retirement investments and taxes

Understanding tax-advantaged investment strategies for retirement—and when to withdraw your funds—may help you build your investments and lower your tax bill.

Tax-savvy college savings plans

Discover how 529 college plans may help you save money for higher education expenses and potentially benefit from tax advantages

Estate planning and inheritances

An estate plan may help you minimize gift and estate taxes and preserve more of your assets for those you care about.

 

Tax Avoidance Is Legal; Tax Evasion Is Criminal

Individuals and business owners often have more than one way to complete a taxable transaction. Tax planning evaluates various tax options to determine how to conduct business and personal transactions in order to reduce or eliminate your tax liability.

Although they sound similar “tax avoidance” and “tax evasion” are radically different. Tax avoidance lowers your tax bill by structuring your transactions so that you reap the largest tax benefits. Tax avoidance is completely legal—and extremely wise.

Tax evasion, on the other hand, is an attempt to reduce your tax liability by deceit, subterfuge, or concealment. Tax evasion is a crime

How do you know when shrewd planning—tax avoidance—goes too far and crosses the line to become illegal tax evasion? Often the distinction turns upon whether actions were taken with fraudulent intent

Business owners often find themselves subject to more scrutiny than wage-earners with a similar level of income. Why? Because a business owner has more options to avoid tax, both legally and illegals

 

Adding Things Up Some Year-end Tax Planning Tips for Your Medical Practice

Thanksgiving is almost upon us and the holiday season is just around the corner. What better time than now to think about year-end tax planning for your practice, as well as yourself?

Annual Bonuses

There is no better way to show your appreciation toward employees for all of their hard work than a bonus at the holidays. Not only will it help to improve morale and keep them working hard into the New Year, but, if paid out before Dec. 31, it is a deductible expense and lowers your taxable income.

In terms of your own bonus, there are more items that should be considered. If you are an entity whereby the tax is paid at the individual level, a year-end bonus has no impact on taxes paid. Here, the consideration should be on the cash needs of the practice and owner.

Retirement Plan Contributions

Retirement-plan contributions are one of the most valuable tax -saving techniques that you can utilize. By making such a contribution, practices are able to reduce current taxes, while the individuals are able to defer taxes until they retire and take distributions. Another nice feature is that, except for employee deferrals, you have 2 1/2 months after year end to fund the contribution.

Medical and Office Equipment

For those practices that may have a few pieces of outdated equipment, or if there is that new machine you have been eyeing for some time, now may be the perfect time to make that purchase. The recently passed Small Business Jobs Act of 2010 contains some great provisions relative to the purchase of new medical and office equipment.

 

Tax Planning

Tax planning involves conceiving of and implementing various strategies in order to minimize the amount of taxes paid for a given period. For a small business, minimizing the tax liability can provide more money for expenses, investment, or growth. In this way, tax planning can be a source of working capital. Two basic rules apply to tax planning. First, a small business should never incur additional expenses only to gain a tax deduction. While purchasing necessary equipment prior to the end of the tax year can be a valuable tax planning strategy, making unnecessary purchases is not recommended. Second, a small business should always attempt to defer taxes when possible. Deferring taxes enables the business to use that money interest-free, and sometimes even earn interest on it, until the next time taxes are due.

Experts recommend that entrepreneurs and small business owners conduct formal tax planning sessions in the middle of each tax year. This approach will give them time to apply their strategies to the current year as well as allow them to get a jump on the following year. It is important for small business owners to maintain a personal awareness of tax planning issues in order to save money. Even if they employ a professional bookkeeper or accountant, small business owners should keep careful tabs on their own tax preparation in order to take advantage of all possible opportunities for deductions and tax savings. Whether or not an entrepreneur enlists the aid of an outside expert, he or she should understand the basic provisions of the tax code.

GENERAL AREAS OF TAX PLANNING

There are several general areas of tax planning that apply to all sorts of small businesses. These areas include the choice of accounting and inventory-valuation methods, the timing of equipment purchases, the spreading of business income among family members, and the selection of tax-favored benefit plans and investments.

Accounting Methods Accounting methods refer to the basic rules and guidelines under which businesses keep their financial records and prepare their financial reports. There are two main accounting methods used for recordkeeping: the cash basis and the accrual basis. Small business owners must decide which method to use depending on the legal form of the business, its sales volume, whether it extends credit to customers, and the tax requirements set forth by the Internal Revenue Service (IRS). The choice of accounting method is an issue in tax planning, as it can affect the amount of taxes owed by a small business in a given year.

Accounting records prepared using the cash basis recognize income and expenses according to real-time cash flow. Income is recorded upon receipt of funds, rather than based upon when it is actually earned, and expenses are recorded as they are paid, rather than as they are actually incurred. Under this accounting method, therefore, it is possible to defer taxable income by delaying billing so that payment is not received in the current year. Likewise, it is possible to accelerate expenses by paying them as soon as the bills are received, in advance of the due date. The cash method is simpler than the accrual method, it provides a more accurate picture of cash flow, and income is not subject to taxation until the money is actually received.

What Do Online Payroll Services Offer?

• Payroll processing: Online payroll services automatically calculate how much employees should be paid each pay period. The systems account for wage rates, shift differentials, overtime, holiday pay and taxes as well as Social Security and benefit deductions. They then make payments to employees by direct deposit, prepaid debit cards or paper check.
• File and pay payroll taxes: These services can withhold employee taxes, file quarterly payroll tax reports, and pay tax withholdings to the proper local, state, and federal agencies. They also issue employee W-2 and 1099 forms at the end of the year. Some services offer an error-free guarantee. If a mistake is made, these payroll companies will correct the error and pay any fines or interest incurred.
• New hire reporting: Many payroll services report new hires to the government on your behalf.
• Integrations: Online payroll services integrate with a variety of payroll-related programs businesses are already using, such as accounting software, time and attendance systems, and human resources software.
• Paid-time-off management: Many of these services manage paid time off by tracking how many vacation and sick hours employees have earned and how much they’ve used. Some payroll solutions even facilitate the time off request and approval process.
• Employee self-service: Typically, employees can access the online system to view pay stubs, PTO balances and year-end tax forms.
• Mobile access: Many systems offer mobile apps or mobile-friendly websites that let businesses manage and run payroll from smartphones or tablets.
• Payroll reports: Detailed wage and labor reports from your service can provide a deeper look at how a business operates.

 

THINGS TO CONSIDER WHEN CHOOSING A PAYROLL PROVIDER

TIMING OF A PAYROLL CONVERSION

Deciding when to implement a new payroll solution is important. If you are considering a mid-year conversion, Quarter 2 is a good time to start the process. Another option is to convert at the end of the year. The ideal time to begin a year-end conversion is October so it doesn’t conflict with any year-end processing you need to handle.

DATA CONVERSION

When considering a conversion, it’s important to also look at whether the payroll system is unified with core HR and attendance. When payroll, core HR, and time tracking data are stored in a centralized database, this provides many benefits.

DATA INTEGRATION CAPABILITIES

Many companies have existing business investments for benefits, such as general ledger software, point-of-sale (POS) systems, and retirement packages. The ability to integrate these existing systems with an online payroll system is a huge benefit as all of the data is accurate and up-to-date.

PAYROLL TAX COMPLIANCE MANAGEMENT

With payroll tax compliance rules constantly changing, it’s crucial to utilize a payroll provider with a tax compliance department that will help manage these updates. Once conversion is complete, a tax compliance team should update your payroll tax tables each year, and help with year-end processing.

DATA CONVERSION

One of the most important steps of the conversion process is migrating company data out of your old system and into the new system accurately. To ensure your data will be accurate, make sure the following tasks are performed.

 

How to Choose the Right Payroll Service

How much do I know about payroll?

If you aren’t a payroll expert, you need an easy-to-use software solution. Payroll software automates a complex process, and the point of automation is to free your time, not take it up.

Which basic features should a payroll software have?

First, let’s go over the key parts of running payroll. Running payroll is the process of entering the hours employees worked during a pay period, calculating their gross wages, determining deductions, and giving employees their net pay.

How much do I want to spend?

Deciding how much to spend on payroll is challenging since many factors go into the cost. To get started, learn what other businesses spend on payroll services.

What payroll software charges should I worry about?

Don’t buy payroll software until you check for contracts, additional fees, reviews, and free trials.

Which platform will I run payroll from?

Because you can purchase online or desktop software, identify where and how you’d like to run payroll.

 

Easy Tips For Choosing The Best Payroll Software Services

Analyze Features offered by Payroll software services

It is important that you first analyze what kind of functionalities the software has to provide to you. The payroll system you are looking at should be accurate and able to clock in the correct timings for each employee. Apart from that tax deduction, record keeping, and scheduling of processes are features that should definitely be a part of your payslip software.

Find whether the software is Cloud based

During 2016-2020 Technavio has fore-casted the growth of global cloud based payroll software solutions market at a CAGR of 6.94%. This gives a fair idea about the possibilities of customization and expansion available to us. Businesses need to work 24*7 and without any restrictions of time and place. Looking for payroll on the cloud which has the above benefit would make it easy for the manager to approve even basic requests from wherever he is at that moment.

Integration with other business processes

It is important that you look at the larger picture when you decide particular payroll software for your business. You may outsource your payroll functions to an outsourcing firm but still, it is critical that the small business payroll software you choose matches well with your business processes.

Optimize use of Budget

Payroll software cost is one of the important factors that you should keep in mind while making your choice of software. However, do not make the mistake of making it the most important criteria for selection. This is because buying low-cost payroll management services may save you some money but its use would involve a lot of other administrative expenses.

Security to be paid due attention

As per Cyber security ventures, global ransom ware damage costs will reach exceeding proportions to the count of $5 billion. This figure is exceedingly high in comparison to $325 million in the year 2015. Payroll solutions involve a lot of sensitive data in terms of employee’s salaries and their performance reviews. Security of your data would be completely dependent on the kind of payroll software you select. Your choice of HR software solutions should be one that is able to create encryptions at different levels.

 

Tips for Choosing the Best Payroll Service for Your Business

Self-Service

If you don’t want to be fielding all sorts of questions from your employees, you’ll want to ensure that the payroll company you choose has employee self-service. If your employees can log in to view their own payment and tax info, then they won’t need to ask you.

Pricing

The other important thing to look at before trying out a payroll service is how much you’ll be paying. This is especially important for small businesses that don’t require as extensive service as larger companies.

Reputation

How do you find out if it’s going to be easy before signing up? Look at customer reviews online. There’s no better way to find out how easy and functional a payroll service will be than listening to previous customers. Read Google and Yelp reviews to find out what you’ll be dealing with.

Look at Ease of Use

The whole reason that you’re outsourcing payroll is that it’s time-consuming. The service that you choose should be easy to use. If it’s a payroll company, they shouldn’t ask too many questions because they should know what they’re doing.

Figure Out What Your Needs Are

The first thing you should do is figure out exactly what you need. If you’re a small company, you might be able to get away with using a simple application that quickly does payroll for you like Patriot or Intuit.