Income and Tax Planning – Part One

Cash in Pocket

Benjamin Franklin once said “in this world nothing can be said to be certain, except death and taxes.” In this day and age, this quote holds true more than ever. However, despite being unable to avoid taxes, there are definite ways to lower your tax burden through strategic tax planning. This article seeks to give some background information on why tax planning is crucial to everyone’s success.

In 2014, a self-employed individual with taxable income of $91,000 is faced with tax rates at over 60%.  This means that, without advanced tax planning, this self-employed individual’s after-tax income is roughly $36,400, while the rest of this individual’s hard earned income goes to the government.

What many individuals do not understand is that income tax is not the only tax burden that people face. Rather, there are different types of taxes that are assessed at various situations such as social security tax, Medicare tax, sales tax, property tax, estate tax, gift tax, fire prevention tax, custom tax, etc.  All of these are additional taxes that many people do not plan ahead for.

For example, let’s take a husband and wife who are both doctors.  They plan to have their 2nd child by end of year 2015. Therefore, they have decided to work extra hard in 2014 by taking on more work, additional hours, night shifts, and even contracting work on the side.  As a result, their taxable income has increased from $300,000 to $420,000. Unfortunately, they did not realize that with increased income come additional taxes.

Situations such as this are very common today. Hardworking individuals that decide to earn more money actually get penalized in taxes for making that additional income. Going back to the husband and wife example, their increased tax burden was the result of the lack of proper planning, which essentially resulted in free labor.  

The federal tax code and California’s tax code are very complicated, but do provide a lot of opportunities to lessen anyone’s tax burdens. However, the only way to take advantage of these strategies is to take the time to speak with a CPA professional about tax planning.

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Daniel Lu

Daniel Lu - Certified Public Accountant

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  1 comment for “Income and Tax Planning – Part One

  1. April 20, 2017 at 1:20 pm

    Great article and very well explained. I believe in professionals so this is a very useful article for everyone. Many thanks for your share.

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