Two things that you cannot avoid are death and taxes, or so the saying goes. Taxation must be a critical consideration in your financial planning activities because it is a source of cash inflow or outflow that can reduce the size of the wealth that you create over time if not handled wisely.
Taxes affect your personal finances by reducing the money you have for saving and investing to achieve your financial goals. And if you do not plan your taxes diligently, you may lose a lot of money at a time when you need money most or when recovery from tax penalties may be near impossible.
You can save some money through certain tax allowances and techniques which provide legal ways of reducing your tax payouts.
A good starting point to find out where you can save is to know the types of taxes that directly affect your personal finances.
Taxes Affecting Your Personal Finances
Taxes on goods and services we purchase for consumption purposes are typically incorporated in the purchase price, so your primary ways of saving from these sources of taxes are to avoid the purchase altogether or buy a lower priced substitute.
The other where your planning diligence will also payoff significantly are:
- Tax on work income - taxes on wages, fees for work done, etc
- Investment Income Taxes - capital gains from appreciation in value or income (dividends and interest) received on an investment.
- Gift or wealth transfer taxes - this may apply when you receive a gift or transfer of asset from the estate of a relative or other benefactor.
- Property Taxes - applicable to real estate properties you may own
- Benefit Payment and Withdrawal taxes - Certain accounts particularly for retirement savings, investment and life insurance purposes may have tax allowance provisions that encourage people to make contributions to such accounts on a pretax basis and enjoy tax free withdrawals as long as they meet certain conditions.
Now that you know these different types of taxes, the next step is to find out where and how you can reduce these taxes by identifying allowances that you could previously deduct but did not know about and other techniques that may be available to you, including paying your taxes on time to avoid penalties.
Tax allowances and savings provisions vary based on the tax codes that apply to your situation. Start off by first checking with your tax authorities and a tax expert in your jurisdiction to understand what tax saving provisions you can take advantage of.
Check out the two videos below for some knowledge and inspiration.
This first video is a short overview of the history of taxation.
This second video is an inspirational one by Dorothée Loorbach and her journey out of a tax nightmare to financial independence and the 10 lessons she learnt from it all.
Where have you been able to save on taxes? What techniques have you used that have worked or not? Do share your experience to help others by commenting below.