The Basics of Tax Planning for Business Owners

Before you can ask the question of “how much can I reduce my tax bill?”, It is important to understand two fundamentals: your tax bracket and your effective tax rate.

Your tax bracket changes as you make more income. It starts at 10% and then it goes up to 12%, 22%, 24%, all the way up to the highest bracket, which is 37%. Only the income made within a bracket is taxed at its rate, which is one of the things that leads to the difference between your tax bracket and your effective tax rate. Simply put, your effective tax rate is the percent of every dollar you make that goes to paying taxes.

Tax planning revolves around three questions:

1. how much of your income do you really want to go to paying taxes

2. how much income you want to keep

3. what level of audit risk are you comfortable.

Remember, just because some people complain that they’ve paid too much tax, that doesn’t mean that their effective tax rate is high.

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