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definition tax planning

 tax definition

The tax can be defined as specific mandatory amounts that are imposed by the state on individuals or legal entities, so that these amounts are due within a certain period of time, and taxes are imposed in most countries of the world, and the legislation related to taxes, their rates, and the categories that are obligated to pay the tax according to what is stipulated The different laws of each country, and one of the most important economic tasks of tax for countries is to move the wealth of individuals and organizations so that part of the funds that make up these wealth return to the state, as this helps to develop the national economy, and the development of projects related to improving goods and services and raising the welfare of individuals in the state, and the concept of planning is linked Taxation is directly related to the concept of tax, and in this article the definition of tax planning will be addressed.
definition tax planning
definition tax planning

definition tax planning

Tax planning in accounting science can be defined as an integrated tax process that takes place by conducting a comprehensive analysis of the existing financial situation for the individual or legal entities from a tax perspective to ensure that the tax efficiency of the individual or legal entities is at its highest levels, and the concept of tax planning is directly related to the concept of Financial planning, and the definition of tax planning includes the use of the financial plan related to the income of individuals or legal entities and all available discounts and exemptions in order to reduce tax liability to the minimum possible extent, and this leads to achieving future financial gains that contribute to the achievement of individuals and organizations for their financial goals, and the increase of individual capital. or regulator.

Importance of tax planning

Tax planning affects the future of business for individuals or organizations by stimulating individual or organizational business activity through the financial amounts that are provided depending on the presence of effective tax planning. Reducing the tax burden means providing more financial liquidity, which means more investment, which is directly reflected on Increasing profit for individual activity or for organizations, and on the contrary, ineffective tax planning may lead to additional tax burdens during the fiscal year, which affects the economic growth of organizations or related individuals due to a decrease in investment and a decrease in the volume of business activity for them, in addition to that increased obligations Tax may cause a delay in capital growth.

Also, tax planning, although apparently linked to bearing some financial expenses and obligations, results in bearing tax planning expenses in avoiding relatively larger tax values ​​due to incurring immediate tax planning expenses, and this leads to the concept of tax avoidance, which means exploiting some loopholes in laws and tax provisions. In a manner that does not violate the law in order to alleviate the tax burden on taxpayers during a specified period of time, the concept of tax avoidance in English is called Tax Avoidance, and the tax law includes in its rationale a set of details that the taxpayer must take care of and take into account to distance himself from any fallacies Legal or irregularities punishable by law.

tax planning strategies

For organizations, the concept of tax planning is implemented on the ground through a variety of strategies that contribute to reducing the amount of tax borne by the individual or borne by organizations to the least possible, and tax planning strategies may differ between the case of individuals and the case of organizations due to the different privacy and nature of individual business activities or collective, and can be summarized through the following:

Incur additional expenses

Where organizations seek to incur additional operating expenses that contribute to reducing taxable income, and this method is usually resorted to at the end of the fiscal year by purchasing a set of new equipment that can be used in later years, and here it must be emphasized that purchases should be made in a thoughtful manner Contribute to reducing the amount of tax as much as possible, as well as that these purchases are commensurate with the activity practiced by the organizations, and are not purchased in vain.

tax deferral

Many organizations resort to trying to postpone some tax obligations to later financial periods, and through deferred taxes, the funds are used without interest on them, and it may even come to earning some interest on them, to be taxed in subsequent periods of time.

Individual tax planning strategies

Individual tax planning strategies come as opportunities that those in charge of individual businesses must exploit optimally so that tax planning achieves the positive results that individuals desire from it. In order for individual tax planning to be effective, the following must be taken into account:
  • Timing and income transfer: where individuals who own small businesses have the ability to transfer the income they get from their individual project to another individual, including individuals within the framework of the same family, and this helps to enter into tax brackets that are not required to have high tax obligations, For its part, the tax department seeks to verify individual income to ensure that individuals comply with the tax payments to the state based on individual income.
  • Ideal retirement planning: Individuals working on individual projects have the opportunity to defer specific tax amounts by putting some of these amounts into a retirement account, and employees working in some organizations can provide specific tax coverage within the retirement plan.
  • Employment benefit plans: Employees working in many organizations have some benefits that can be an entry point for effective individual tax planning, and an example of this is medical benefits that contribute to reducing tax obligations in some cases.
  • Deductions and work expenses: There is a prominent role for some deductions on income and some other work expenses in the tax planning process, as work deductions contribute to reducing the taxable income of the individual, while work expenses on individual projects are included in the operating expenses to reduce the tax obligation of the individual project.

Safe tax planning

Safe tax planning can be defined as that tax planning that is in line with its means with the tax law in force in the country, so that legitimate methods are used that contribute to reducing taxable income, and here the tax planning practitioner must be alert, and deal intelligently with tax items, What helps in safe tax planning is that tax authorities in many countries of the world do not have to be strict towards a certain category of taxpayers or those charged with it at the expense of another costly category, and this provides a kind of tax justice that contributes to providing tax dues to the concerned authorities on time.

The concept of safe tax planning also includes the presence of some segments of society that have some facilities and tax exemptions so that the tax dues claimed by these groups are relatively few, and the most prominent examples of these groups are the wealthy category in some regions of the United States of America, in addition to the presence of some facilities and exemptions Taxation, the concept of tax planning does not fall out at all in this case, as this segment is charged with supplying amounts to the tax authority within specific tax items, and this makes this category a requirement for effective tax planning because it has the ability to avoid a larger amount of tax entitlements depending on the relatively high level of income.

Factors affecting tax planning

There are many areas in which tax planning is used in companies that engage in different types of commercial activities, so that these areas are affected by a set of factors that establish the general framework for the tax that these organizations owe to the tax authorities during a specific time period, and the most prominent of these factors are the following: :

Accounting Recording Policies

According to generally accepted accounting principles, there are two methods used in the process of recording financial operations in bookkeeping operations in organizations, so that all reports and financial statements that include all financial activities of the organization during a specified period of time are subsequently prepared. The accounting registration process is carried out according to the accrual basis, and the financial statements and accounting records are directly affected by the way in which the financial operations are recorded in the organization in terms of recognizing revenues and expenses, thus affecting the amount of income that is subject to tax in that period, and there comes the role of tax planning, which must be taken into account The registration policy applicable to the organization.

Inventory management accounting

There are many accounting methods that are used in the process of evaluating the inventory of organizations, and the way in which the inventory of organizations is evaluated affects the amount of taxable income due to the presence of what is known as tax savings that differ between one valuation method and another, and one of the most prominent methods that are used in the accounting inventory valuation First-in, first-out method, which is abbreviated in English as "FIFO" taken from "First-In, First-Out", and last-in, first-out method, which is abbreviated in English as "LIFO" taken from "Last-In, First" -Out", as each method has different tax consequences.

Business Purchases

According to some tax laws, organizations are allowed to deduct specific values ​​from purchases made in the same year when the total amount of purchases reaches a specified amount annually. This is called a tax incentive which makes future tax burdens relatively lower due to business spending in accordance with applicable tax provisions, This is not limited to organizations, but the tax incentive is also applied to the case of individuals provided that the personal property is used for commercial purposes with the exception of cars and real estate.

Dependency and Job Taxes

For individuals, the number of family members controls the amount of the tax burden borne by the taxpayer in accordance with the applicable tax provisions, and in general, dependents under 18 years of age are not subject to their maintenance expenses related to medical care and social security, and there is a ceiling for taxpayers based on annual income is determined It determines whether or not he is subject to tax, and this ceiling also includes employees working for organizations, where the organization is responsible for supplying a specific amount to be taxed by the employee in case the annual income exceeds a specific ceiling.

Tax planning and law

Knowledge of tax law is one of the most important priorities that individuals or organizations must take into account during the tax planning process, and the beneficiary of the tax planning process must take into account the mechanism by which the tax plan is imposed on the ground, whether it is through the taxpayer himself or his representative. From lawyers, tax or financial advisors, because the implementation of tax plans in some cases may result in a misunderstanding or miscalculation of the tax reality.

Poor tax planning or failure to implement tax plans correctly may lead to legal consequences related to the concept of tax evasion that violates the law. On the other hand, tax planning in accordance with tax regulations and rules has an effective and positive impact on those charged with paying tax dues within the provisions of the applicable tax law, from By reducing the value of the tax burden incurred by them in a proper manner in accordance with the applicable tax regulations and rules.

Tax planning and investment

The relationship between tax planning and investment is represented in the presence of some tax responsibilities associated with investment tools, which can be transferred to future periods depending on the nature of the investment tools and what they can transform into in the future. Among the most prominent examples of investment tools that are taken into account in the tax planning process are treasury bills , bank certificates, savings bonds, and deferred annual incomes, and organizations are trying to use investment portfolios containing a variety of these investment tools for the purpose of deferring tax payments that would have been due in the current period to tax values ​​that may be due in the future.

Tax advice and tax planning

Tax advisors have a greater ability to analyze financially and develop appropriate tax plans and strategies that contribute to reducing organizations or individuals’ burdens of tax burdens. There is a constant update on tax laws from year to year, which may affect some small details that lead to incurring or avoiding tax burdens.

On the other hand, tax advisors are interested in holding periodic and emergency meetings with those in charge of individual or organizational business in order to deal with the financial situation of individuals or organizations in order to discuss all that is new, and the importance of having a tax advisor increases in large organizations in which the volume of business is large Scope, because this is associated with a relatively higher income, and entails greater tax burdens, as the presence of a good tax advisor helps to avoid them or a large part of them.
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