Tax planning refers to the practice of taking advance steps and using financial strategies in order to achieve the best possible outcome for individuals. By planning taxation in advance, individuals and businesses with lots of assets are able to reduce their overall tax burden.

The most common tools used by tax experts in tax planning are deductions and exemptions. Exemptions remove certain assets or portions of assets from being considered taxable. Examples of exemptions can include exemptions for social security, medicare, or other government programs. 

Deductions work by removing certain portions of taxable income or assets from an individual’s gross income. Common deductions that are taken include head of household deductions and standard income tax deductions.

By planning out tax strategies in advance, individuals and businesses can take intentional actions that are intended to serve a future point when it comes time to file taxes. Tax planning experts can advise individuals and businesses throughout the fiscal year on a number of exemptions, deductions, and avoidance strategies that reduce overall tax liability.

When seeking to reduce an individual’s tax burden, there is a clear legal distinction between tax avoidance and tax evasion. Tax avoidance involves using deductions, exemptions, and allowances in the law to reduce an entity’s tax burden. On the other hand, tax evasion is the practice of using deceit or deception to fraudulently avoid paying taxes. Tax evasion is classified by its intention to deceive a tax entity and the performance of fraudulent behavior.

The best time to begin tax planning is at the beginning of the fiscal period, though any time before taxes must be filed is a good time to plan taxes. If a business or individual is concerned about tax planning, they should contact an experienced tax law attorney who knows the local, state, and federal tax laws that apply.