The most popular definition of tax planning is the yearly process of forecasting one's tax liability and formulating ways by which to reduce it. No wonder most people view the thought of having to do tax planning as sheer drudgery! In actuality, systematic, proper and effective tax planning is one of the greatest tools you can have in your financial arsenal.

First, it is important to realize that tax planning includes a great deal more than staying on top of what you owe the feds, the state, and possibly the city, every year. Effective tax planning can literally help ensure your future for years to come.

The establishment of, and your contributions to pension plans such as Individual Retirement Accounts (IRAs), Keogh accounts, solo 401(k)’s, SEP’s and SIMPLE’s is a primary vehicle for building your future wealth. You are creating a portfolio of financial strength while deferring money that would otherwise be taxable in any given year. Tax planning literally becomes a win-win situation from your perspective. Your accountant will explain the differences in the various accounts and why one is better suited to your needs at any given time. Is should be noted that some plans require contributions be made prior to December 31st of the taxable year while others require contributions be made by April 15th of the following year.

From the daily perspective of business owners, tax planning is one phase of knowing where your business stands throughout the year. With the help of your accountant and/or bookkeeping service you keep current records of all income and expenses related to the business. (QuickBooks is the most popular tool enabling you to keep accurate records.) These records allow you to make solid projections for receivables and expenses on a quarterly, semi-annual and annual basis as well as give you all the information required to attain lines of credit for company growth.

These records and projections, along with your tax planning, gives you the information to decide if a major expense should be included in this year’s business costs or deferred until the following year. As cited earlier, contributions deadline for savings accounts differ contingent of the type of account and this is also factored in during the tax planning stage.

Tax planning should be done in October of the year taxes are to be paid. This leaves you time to incur expenses, buy new equipment or implement the first phase of a planned expansion as well as plan for contributions and/or sock away some needed cash for estimated tax payments coming due. Once you and your accountant have completed your first tax planning effort both of you will have a game plan or roadmap in place for all future ones.

Your accountant(s) knows your business and your goals. It benefits you to have a discussion with them on your tax planning as well.