Taxes and death are perhaps the only two things which every individual has to face once during his or her life while one cannot make any plans about how to deal with death but when it comes to taxes one can surely make plans to reduce the burden of the tax. Tax planning in simple words refers to predicting the tax liability on the basis of expected income from various sources and then taking necessary steps to ensure that tax liability is reduced. In order to understand more about tax planning, one should look at various features of tax planning –
Tax Planning Features
Reduction in Tax Liability
The first and foremost characteristic of tax planning is that it results in the reduction in tax liability of an individual which ensure that an individual has more disposable income which can be used by an individual for consumption for making investments which can come in handy in future. Hence for example, if an individual is able to save $2000 per year for 20 years due to tax planning and invest it wisely then it can lead to substantial corpus 20 years down the lane which can be of great help when an individual take retirement.
Advance Planning is Needed
Another feature of taxation planning is that one needs to plan in advance regarding how to make sure that tax liability is reduced to maximum possible extent by investing in tax saving instruments right from start of the financial year because if you are thinking that you can reduce your tax liability by doing taxation planning night before the last date for filing income tax returns than you will be in for disappointment.
Investment in Tax Saving Instruments
Tax planning can be done only by investing in tax saving instruments which can be through bonds or mutual funds or fixed deposits of banks. In simple words, one cannot claim tax relief by making an investment in any asset rather one has to make an investment in instruments for investments available in the market if one wants to claim tax relief from tax authorities.
Made Every Year
Taxation planning is one thing which has to be made every year and unlike other investments like real estate or stocks where one has to review the investment after 2 or 3 years. In simple words just like you get increment in your job every year in the same way taxation planning has to be done every year unless you stop earning enough money to be tax liable.
Dynamic Nature
Tax planning is dynamic in nature because every year you have to modify your tax plan according to rules framed by the government as the government keeps changing tax laws which in turn keep the tax planner on toes as he or she has to change his or her investment in tax saving instruments accordingly.
As one can see from the above features of tax planning that it is of great help not only in saving money for the current period but also make sure that on your retirement you receive a good amount of money out of saving generated due to taxation planning.