While a tax return is important for understanding what happened in the past, a tax projection can help you plan for what will happen in the future. A well-planned tax projection can help you take advantage of opportunities to save money and grow your wealth.
Keep reading to learn how to run a tax projection and the biggest benefits of this tax planning strategy.
What are Tax Projections?
A tax projection is a calculation of what your tax liability will be in the current year. By projecting your income and deductions, you can get a good idea of what you will owe in taxes. This can help you make changes to your tax situation before the end of the year
A well-formulated tax plan also involves running multiple scenarios on your current year income. Projecting your current and future years' taxes can help you see the full picture of what you will owe and help you make the best decision for your situation.
How Taxes Have an Impact on Your Financial Plan
Understanding your tax liability is a large part of financial planning. You never want to be surprised by a tax bill, or lose out on a wealth-building opportunity.
There are a few ways that taxes can have an impact on your financial plan:
- Taxes can impact your retirement plan: You may find that tax-deferred or tax-advantaged accounts are more advantageous than taxable accounts.
- Taxes can impact your investment strategy: Whether your investments are in the form of stocks, bonds, real estate, or other assets—you will face taxes on your gains.
- Taxes can impact your philanthropic giving: You can take advantage of tax-deductible charitable donations to reduce your taxable income.
- Taxes can impact your estate plan: You will want to consider the tax implications of your estate before you finalize your plans.
By understanding how taxes impact your financial plan, you can make better financial decisions for your life circumstances.
Top 3 Tax Planning Benefits
1. Tax Projections Strategically Optimize Taxes
Everyone needs to pay the taxes they legally owe—but there's no need to pay more than you're required to. Additionally, tax projections can help you strategize the deductions and credits you are eligible for.
For example, perhaps you want to develop a charitable giving strategy. You may find an opportunity to bunch deductions in alternate years to maximize their value.
2. Tax Projections Help You Avoid Tax Surprises
Imagine getting a large tax bill that you were not expecting. This could cause serious financial hardship and stress. Running a tax projection can help you avoid this type of situation by giving you a clear picture of what you will owe. It takes the guesswork and stress out of tax time.
By knowing what you will owe in taxes, you can plan ahead and make sure you have the money set aside to pay your tax bill. No last-minute scrambling or unpleasant surprises come tax time.
3. Tax Projections Can Uncover Wealth-Building Opportunities
A tax return looks back at your overall financial picture for the past year. A tax projection looks forward and can help you uncover opportunities before the end of the tax year, and into the future.
You are in a proactive mode, rather than a reactive one, so you can take advantage of financial planning opportunities. This is an important distinction because it can help you grow your wealth over time.
By being proactive and looking at your tax situation in advance, you can make decisions that will save you money—money you can then reinvest in your future.
Need Help With Your Income Tax Projections?
Tax projections and tax planning are essential for everyone, but can be especially complex for those with high incomes, multiple sources of income, or investments in different types of assets.
Our firm offers personalized tax projection and planning services. We work with you to understand your unique financial situation and develop a tax plan that minimizes your taxes and helps you grow and protect your wealth.
If you're looking for guidance on your tax planning, contact us today. We can help you develop a plan that takes advantage of opportunities and helps saves you money, so you can look forward to a bright financial future.
The Team at Chatterton & Associates
Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed. Federal tax laws are complex and subject to change. This information is not intended to be a substitute for specific individualized tax or legal advice. Neither Royal Alliance Associates, Inc nor its representatives provide tax or legal advice. As with all matters of a tax or legal nature, you should consult with your tax or legal counsel for advice.