Question

What is the importance of tax planning within the scope of financial planning? Why might we consider tax planning throughout the year? What is the difference between tax preparation and tax planning?

Answer 1

Importance of business tax planning

Tax planning strategies are typically employed to help a business achieve their financial and business goals. There are benefits of tax planning for both large and small businesses and planning plays an important role in:

• Lowering the amount of taxable income
• Reducing the tax rate
• Allowing greater control of when taxes get paid
• Maximising tax relief/tax credits available

There are always new laws and changing allowances, so regular reviews are important ON TAX PLANNING THROUGHOUT THE YEAR

There are also different types of business tax planning strategies. Here are a few areas where an advisor would be able to benefit you and help you to save tax:

Capital gains tax

Planning for CGT means taking a number of things into account, such as what is being sold and who it is being sold to. Tax planners can do the calculations for you, and tell you what assets are exempt, or what should be included.

Corporate tax

Corporate tax is often a large cost to profitable companies. However both small and large businesses can retain more profit or extract more value from the business from corporate tax planning.

Corporate tax planning strategies include:

• Deferring income or profits
• Bringing forward costs
• Capital allowances

International tax

Whether doing business internationally, planning to live outside the UK or coming to the UK to run a business and live here, International tax planning can help you save non UK tax as well as UK tax. International tax planing strategies include:

• Timing of tax bills
• Using tax deferral opportunities
• Foreign tax credits
• Avoiding double taxation

Dividend/year end tax planning

If you expect to hold a significant profit in your limited company this year then it may be wise to draw out a large dividend. Tax consultants will be able to advise you on the most tax efficient way to pay yourself and your employees.

Inheritance tax

Paying inheritance tax (IHT) when you die may reduce the amount of your estate that ends up being passed on to loved ones. There are IHT opportunities involving the family home such as;

• Gifting property,
• Downsizing
• Remortgaging & insurance options.
• It is also possible to use available strategies involving pension funds.

DIFFERENCE BETWEEN TAX PLANNING AND TAX PREPARATION

Tax preparation is a service that helps you file your tax returns. The main goal is to make sure your tax reporting complies with both federal and state tax laws.

Tax planning is a service that helps you optimize your tax situation before reporting. The purpose is to use legitimate ways to optimize your potential tax consequences based on your goals and plans for future.

Some professional tax preparers may give you general tax guidance and tax savings advice based on your tax returns for recent years. Or they just answer your specific tax-related questions upon your request. However, many of you may not get proactive tax planning advices from them, such as how to use tax loss harvesting to offset your investment gains, how to manage your tax bracket, how to maximize your charitable deduction in a tax-efficient way, when you should do a Roth conversion, what to do with your stock compensations from the tax perspective, what's the most tax efficient way to take your money out from all your taxable and retirement accounts, how to strategically qualify for a larger mortgage amount or financial aid from the income perspective, and so on. Why? Mainly because tax planning is a separate engagement, requiring additional information, time and various aspects of knowledge other than tax filing