Define: Tax Planning

Individuals in tax planning are responsible for aligning financial goals with tax efficiency planning. The purpose of tax planning is to discover how to accomplish all of the other elements of a financial plan in the most tax-efficient manner possible. Tax planning thus allows the other elements of a financial plan to interact more effectively by minimizing tax liability.

Tax planning is a process individuals, businesses, and organisations use to evaluate their financial profile, with the aim of minimizing the amount of taxes paid on personal income or business profit. Effective tax planning entails analyzing investment instruments, expenditures, and other factors such as filing status for their tax liability impact. Accounting, finance, banking, and insurance firms all emphasize slightly different aspects of tax planning in accordance with the types of services they provide and the laws governing their industries. For example, the tax planning advice banks give clients might revolve around choosing investments that provide the most favourable return for the lowest tax liability, while an insurer’s approach to tax planning might include using cash value life insurance for its tax-deferral features. Estate planning is a form of tax planning, in that its intent is to minimize estate taxes after death. A number of retail income tax software packages provide tax planning tips along with step-by-step guidance on tax preparation, and tax planning advice is also available online from the IRS and other sites.

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This glossary post was last updated: 29th March 2024.