Tax planning is critical to effective wealth building, not paying unnecessary tax, as well as avoiding surprises at tax time. Tax planning is important as you experience changes in your life, whether that involves start a new business, health changes, marital status and family changes, or your plans for retirement. These types of events can substantially change the amount of tax you pay and as such, create opportunities to make plans to either lower your tax burden or make shifts as to when you'll pay taxes that is most advantageous to you to maintain and build your wealth.
When building wealth, income is being taxed each year, whether that's through your earned income (i.e. a job or being self-employed) or through investments such as real estate or the stock market. This process is also happening if you have investments in companies where you've invested with limited involvement or provided financing with the hope of generating a return (passive investments and loans). There are a multitude of options that exist to use the tax system to build wealth efficiently and lower your tax burden, potentially saving hundreds of thousands of dollars over a career.
A self employed individual that generates $100,000 or $200,000 of profit for his or her business could save thousands in taxes by making strategic tax decisions and leveraging the tax code. The great thing is that these strategic decisions were things the individual would have likely made the decision to do anyway. An example of this would be investing in retirement. Often, it's the type of accounts a person has in retirement that determines how it is taxed; deciding whether invested funds should taxed now or in the future. In this simple scenario, it may save thousands in taxes to pay the tax now during a down year or later if you expect to have less income and thus be in a lower tax bracket. Indeed, tax planning is valuable.
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