What Happens To Your Tax Liability With Proper Financial Planning? - Doane & Doane

While you can’t escape taxes, it doesn’t mean you can’t minimize them or, in the least, avoid paying more than you owe. 

Financial planning is often ignored by Florida residents, despite the fact more attention in this area will preserve your income while reducing your tax liability. 

So, join us today as we explain what happens to your tax liability with proper financial planning and how you can implement some basic strategies into the mix.

What is Tax Liability?

To figure out what happens to your tax liability with proper financial planning, you first need to understand the concept of tax liability. In short, it’s money that an individual or an organization owes to any tax authority, be it local, state, or federal. You can also view it as the difference between the deductions you can claim and your taxable income. 

Generally speaking, a higher income correlates with higher tax liability. You can thank the graduated tax system we have in the US that ensures the income and tax rates stay proportionate. 

Though your taxes are primarily dictated by your income, your capital gains can also impact your tax liability. This is very important for individuals who are in the process of building their wealth by investing. If you’re amassing capital gains from your investments, as a higher net-worth individual, you will have more tax liability - plain and simple.

Impact of Financial Planning on Your Tax Liability

Managing tax liability directly influences how much of your hard-earned cash you can add to your wealth. This allows you to build a higher net worth a lot quicker since you’ll have more funds at your disposal. 

So, what happens to your tax liability with proper financial planning?

By implementing solid tax-minimizing strategies, you can maximize your assets and income. Even better, you will be able to generate tax savings each year because you can put these savings to good use by investing further or growing your retirement and savings accounts. 

Should You Hire a Tax Professional?

Although you can certainly implement financial planning strategies on your own, there is more merit to hiring a dedicated tax professional or a financial planner. 

Due to their expertise in planning, rules, and the latest tax code, tax attorneys can provide valuable advice every step of the way. This also applies to simple tax circumstances where a professional can find new potential areas of improvement that can result in a more efficient financial planning strategy. 

Most Effective Strategies for Reducing Tax Liability

With that said, if you employ a tax professional to work on your financial planning, they will make use of the following strategies:

1. Investment planning

Investment planning is one of the niftiest methods of managing tax ability, especially for those building their wealth through investing. 

Let’s say you use a taxable brokerage account for investing. You’re most likely familiar that this account is subject to capital gains tax. However, with financial planning, it’s possible to minimize your capital gains tax through various techniques. 

For example, a powerful strategy that many financial advisors abide by is holding investments for over 12 months in order to qualify for a lower tax rate. Similarly, you may also focus more of your attention on tax-saving investments, such as exchange-traded funds that trigger hardly any turnover events, particularly in comparison to standard mutual funds. 

If you own multiple rental properties, a tax professional can offer guidance with deducting expenses for these investments to decrease the capital gains tax. 

2. Using tax credits and deduction

By using available tax deductions, you can shrink your taxable income, effectively placing yourself in a lower tax bracket. Neat, eh?

The challenge here is figuring out which expenses you can deduct. Depending on your specific circumstances, you may be able to deduct the following:

• Self-employment expenses
• Business expenses
• Medical expenses
• Charitable donations
• Mortgage interests

In the same vein, you can minimize the amount of your tax debt on a dollar-for-dollar basis by taking advantage of available tax credits. To clarify, this means that if you qualify for $1k in tax credit and you own the same amount of taxes, you can pretty much wipe out the full amount you owe. 

There are many deductions and tax credits available, some of which you may not be aware of. This is why the biggest advantage of hiring a tax planning attorney is that they can help you explore all the options you have at your disposal.

3. Retirement planning

Retirement planning can have a massive impact on your taxes. While the primary purpose of a retirement plan is ensuring a solid financial future, you must also not forget to address the tax liability regarding your savings. 

To keep your tax liability to a minimum, a tax planning attorney may leverage some of the following techniques:

• Contributing money to your 401(k) every year
• Maxing out your annual contributions to your retirement account
• Funding a Health Savings Account to provide you with a highly-deductible health plan

Another key component of retirement planning is implementing a strategy for withdrawing this money when you approach retirement age. There are many methods your financial advisor can use to make certain you’re minimizing your taxes whenever you withdraw funds from your 401(k). That way, you’ll preserve your retirement supply of cash. 

Lastly, you can also use tax-friendly methods to generate supplemental income once you retire. Favorable options include using a reverse mortgage or purchasing an annuity. 

Start Growing Your Wealth Now!

With an understanding of what happens to your tax liability with proper financial planning, it’s time to get to work. Truth is, you may be paying more to tax agencies than is needed. The only way to make sure your strategy for growing your wealth yields incredible results is to hire leverage professional help. 

Tax attorneys at Doane & Doane can guide you as you navigate the complexities of financial planning. With over twenty years in the business, our law firm will work diligently to reduce your tax liability through a strategic approach and help you always make the right financial choices - big and small. 

Call 561-656-0200 or fill out our contact form to work with the finest tax professionals in Palm Beach. 

Note: 

The information in this blog post is for reference only and not legal advice. As such, you should not make legal decisions based on the information in this blog post. Moreover, there is no lawyer-client relationship resulting from this blog post, nor should any such relationship be implied. If you need legal counsel, please consult a lawyer licensed to practice in your jurisdiction.