Tax Analysis and Financial Planning

Tax Planning and Risk Management

  Tax analysis plays a very important role in reducing our taxes and in the whole financial planning process.

Ever stopped to think about how much taxes you are paying unnecessarily?  Today we grudgingly, accept  that these fees and levies are inevitable and so we often just pay without taking careful consideration to how much of our wealth potential is being lost to taxes. This type of analysis can play a crucial part in assessing your tax exposure and providing a road map to avoiding or reducing the risks. But what exactly do we mean by tax analysis?

The various levels of government impose demands on our income, seemingly at will, to fund various initiatives and to redistribute revenues into the greater society. Taxes are derived primarily from income as it it earned but it also includes permits and licenses, user fees and tolls, sales taxes and property taxes when we spend. Taxes are generally not voluntary , but are mandatory and if not paid can have severe consequences.


Tax analysis is the breaking down of a tax situation into its component parts to better understand the tax exposure and as a result devise strategies to reduce or avoid taxes. The financial and tax planning process, is concerned with

  • Identifying or establishing objectives

  • Identifying and evaluating risks associated with specific situations

  • Evaluating the costs and benefits of suitable alternatives that address these risks

  • Selecting appropriate strategies and implementing them and

  • Monitoring the outcomes as part of the overall process.

 

The Anatomy of a Tax analysis

  1. Assets and liabilities assessment
  2. Income sources e.g. salaries, investment income, capital gains, business income, dividends etc.
  3. Expenditures, these are either discretionary and non discretionary
  4. Tax deferral vehicles and tax efficient investments
  5. Levels of tax deductible debt
  6. Types of investments
  7. Risk management

Let's look at how we are taxed.

  1. We get taxed when we earn income and

  2. We get taxed when we spend our earnings

  3. We get taxed on our capital and investments.

 

Consider two scenarios

The first scenario examines a taxpayer whose primary source of income is from employment.\ In this case taxes erodes your wealth at all stages of the wealth creation process with most of it coming off at the front end. Most individuals fall in this group, leaving them less income to spend and even less to invest

The second scenario examines income which has been optimized. In this scenario income is not taxed at source,taxes are deferred ,taxes on spending has been reduced leaving more money to invest. Risk management vehicles like insurance are in place to ensure income protection at each stage of the wealth creation process,

The most appropriate and suitable tax strategies are in place to minimize taxes while maximizing growth,thus ,creating the potential for a larger estate, to pass on to future generations

 

In summary a tax analysis provides a roadmap for a tax payer to reduce taxes while she earns, reduce taxes while she spends and guides her to strategies to protect, preserve and increase investment income in a tax efficient manner.


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