Understanding taxes is key to financial planning success

Taxes—and all the regulation associated with them—can often be overwhelming, and tax-filing season tends to be a period of high anxiety for many people.

However, by educating yourself about basic yet important tax strategies, you can make a significant difference in your financial future.

Tax planning for income

The goal of income tax planning is to minimize your federal income tax liability. While this can be accomplished in several ways, the most obvious way is to reduce your taxable income. For example, you could:

  • Defer your income to the following year
    If you expect your income tax bracket to be lower in the following year, this strategy can minimize your income tax liability for the current year, allowing you to invest the money you would have used to pay taxes. It works by enabling enough time to pass that, by the time you report the income, you are in a lower tax bracket. Certain retirement plans can also help postpone the payment of taxes on earned income.
  • Shift income to family members in a lower tax bracket
    Giving stock to children as a gift means that any dividends paid on that stock become income to them rather than to you. You can also make a tax-free gift of up to $14,000 (2015 figure) per year, per recipient, without incurring federal gift tax. Before making a decision, become informed on the “kiddie tax rules,” your state’s rules, and investigate all of your options.

Taking advantage of income tax laws

People often associate paying taxes with spending money, but did you know that the nation’s tax laws actually provide opportunities for taxpayers to save money? Consult your tax advisor to discuss tax-saving strategies.

Tax advantages of home ownership

One of the most important tax advantages of home ownership is the ability to deduct mortgage interest. If you itemize your deductions, you can generally deduct the interest you pay on mortgages for primary as well as secondary residences.

Along with mortgage interest, you can also usually deduct:

  • Any points paid on the loan
  • Real estate taxes that have been paid in the taxable year

Additionally, improvements made to your home can increase the tax basis of your home, which in turn, can lower your tax bill when you sell your home. Improvements that increase your home’s energy efficiency may be eligible for federal income tax credits.

Taxes and other financial planning strategies

To learn more about the tax advantages of other financial planning and investment strategies, you may want to read more about the following:

You can also visit for more information about taxes in general.

Understanding taxes is fundamental to understanding your overall financial picture. This section has covered only a small portion of the information that is available about tax planning. For more information and financial advice tailored to your situation, you should work with an expert such as a CPA or a personal financial advisor.

Now, begin learning about investing.

This information has been prepared based on Penn Mutual’s current understanding of tax laws. Any changes in these laws may result in a conclusion different than what is represented, and the concepts described may not be appropriate for everyone.

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