Tax Planning: Five Legal Ways To Reduce Tax Payments
It is a sad reality that a lot of Filipinos just accept their tax liabilities as what it is from their payroll. They seem to have no idea or just neglect the fact that there are ways to legally reduce them.
It is very important to point out that reducing taxes through acceptable and legal means is tax avoidance. And although there is a fine line between the two, tax avoidance different from tax evasion, where there is wilful attempt to avoid taxes by concealing or misinterpreting actual income.In that regard, below are some doable ways to reduce taxes:
Avail of Another Retirement Plan
Even if there are already mandatory government plans for retirement, it is wise to avail of another one to reduce your taxes (i.e. from work). The idea is this – the most basic way to reduce taxes is to lessen income. Of course, it doesn’t mean that you should quit your high paying job and take one that pays less. The point is,if you avail of another retirement plan at work, in paper, you seem to have lesser salary because your gross income is adjusted (lessened) due to your contribution for a traditional IRA (Individual Retirement Account). From this, there is a down side – you receive less every pay day. But to think of it, it’s not half bad because you will receive a whole lot more when you retire.
Declare Dependent/s for Additional Exemptions
Although it may vary, every Filipino is entitled to a personal exemption of PHP 50,000. On the other hand, not all can avail of additional exemptions for dependent individuals. Both exemptions are deductible from gross income so both reduce taxes. That is why it is important to declare any dependent child (up to 4) to avail of the PHP 25,000 (for every dependent) additional exemption.
For purposes of determining whether a person is a dependent or not, here is the definition of a dependent: A legitimate, illegitimate, legally adopted child who is unmarried, not more than 21 years old unless if disabled (in which case can be of any age), not gainfully employed, receives over 50% of support from the taxpayer, and living with the taxpayer.
Double Declining Depreciation
For business owners, as you already know to arrive at the tax liability, you first have to determine the gross income. Then you deduct that with the allowable deductions then multiply it by the tax rate. With basic mathematical operation, you can determine that by increasing the deductions, you reduce your tax liability. This is where depreciation comes in. The double declining method is a depreciation method wherein your depreciation expense is higher in the earlier life of an asset. In turn, your deductions from gross income higher at the early life of an asset hence lesser tax liability.
This may not be applicable for all but it certainly is one way for you to lower your tax. For businesses or corporations, the double declining is very useful especially if a business is starting out or has just been established because its tax liability becomes less burdensome in you first years of operation.
Make Some Donations
Another part of the gross income deductions are charitable contributions or donations. If donations are increased, the tax liability is decreased due to a lower net income (gross income minus deductions). Hence, it is logical to donate some of your income to scientific, religious, charitable, youth, or sports organizations and even the government for that matter to lower your tax liability.
Track All Itemized Deductions
As obvious as it may seem, it is very important to keep track of all your deductions for you to include everything in your yearly tax form and avoid paying beyond your correct tax liability. It is important to point out that it’s not the government’s fault if you don’t know that an item is to be included or if you forgot to include an item that should be part of your itemized deductions.
In that regard, the items that should be included in the itemized deductions are Expenses, Interest, Taxes, Losses, Bad Debts, Depreciation, Depletion of Oil, Gas Wells or Mines, Charitable & Other Contributions, Research & Development, Pension Trusts, Additional Requirements for Deductibility of Certain Payments, Optional Standard Deduction, and Premium Payments on Health and/or Hospitalization Insurance.
To sum it up, there are basically two ways to lessen your income tax liability. First is to reduce your gross income and second is to increase your deductions. It’s up to you to decide on which one to follow. And you must remember that there are more ways to legally reduce your taxes other than what’s mentioned above. You just have to explore and think beyond those two basic ways.