TAX PLANNING – Why it is so Important!
Tax planning is a broad term that is used to describe the processes utilized by individuals and businesses to pay the taxes due to provincial and federal tax agencies. The process includes such elements as managing tax implications, understanding what type of expenses are tax deductible under current regulations, and in general planning for taxes in a manner that ensures the amount of tax due will be paid in a timely manner.
One of the main focuses of tax planning is to apply current tax laws to the revenue that is received during a given tax period. The revenue may come from any revenue producing stream that is currently in operation for the time period concerned. For individuals, this can mean income sources such as interest accrued on bank accounts, salaries, wages and tips, bonuses, investment profits, and other sources of income as currently defined by law. Businesses will consider revenue generated from sales to customers, stock and bond issues, interest bearing bank accounts, and any other income source that is currently considered taxable by the appropriate tax agencies.
In many cases, a primary goal of tax planning is to apply current laws in a manner that allows the individual or business to reduce the amount of taxable income for the period. Thus, planning for taxes involves knowing which types of income currently qualify for as exempt from taxation. The process also involves understanding what types of expenses may be legitimately considered as deductions, and what circumstances have to exist in order for the deduction to be claimed on the tax return.
Two common approaches to tax planning for the purpose of minimizing the tax burden are, first, to reduce the adjusted gross income for the tax period. This is where understanding current tax laws as they relate to allowances and exemptions come into play.
A second approach to tax planning is to increase the amount of tax deductions. Again, this means knowing current laws and applying them when appropriate to all usual and normal expenses associated with the household or the business. Since these can change from one annual period to the next, it is always a good idea to check current regulations.
Advantages of Using an Accountant to Prepare Your Tax Return
- They can offer advice to maximize tax savings opportunities both for the return they are working on and the current and later years.
- They are required to attend substantial numbers of continuing education courses and tax updates. This puts them in the position of staying current, interacting with fellow professionals where tax saving ideas are shared and people that they can discuss specific client situations anonymously with.
- Accountants are planning-oriented, looking to the future to see how clients can arrange things that would reduce their taxes.
- They analyze trends and can use this skill to pick up drifts that can be called to the client’s attention to help them go forward, by the client being able to reverse unfavorable, and capitalize on, favorable changes.
- Through the tax preparation relationship, accountants know their client’s level of aggressiveness and are adapt at explaining the risks of taking tax positions that the CRA might be targeting.
- They are aware of CRA “hit” lists and advise clients against positions that have high probability of challenge and disallowance.
- When clients take positions contrary to the Tax Code, accountant’s prepare the proper disclosures so penalties will not be assessed should a CRA challenge be sustained.
- They are aware of the myriad forms and substantiation requirements and regularly advise their clients about what is needed and when it must be in their possession.
- They are always available to assist and handle tax audits, advise ways to minimize the cost of representation and ways to prepare returns that will not create red flags.
- Accountants can assist with tax agency notices and mail audits.
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