Tax planning starts with which of the following?

• A. Analyzing and understanding your income sources
• B. Claiming tax credits
• C. Filing your tax return
• D. Paying estimated taxes

Answer: (A)

Verified step by step guidance

1. Understand the concept of tax planning: Tax planning involves organizing your financial affairs to minimize tax liability while complying with tax laws. It is a proactive process that starts with understanding your financial situation.
2. Step 1: Analyze and understand your income sources. This is the foundation of tax planning because your income determines your tax bracket, applicable deductions, and credits. Identify all sources of income, such as wages, investments, business income, and other taxable earnings.
3. Step 2: Research applicable tax credits and deductions. Once you understand your income sources, explore the tax credits and deductions you may qualify for. These can reduce your taxable income or directly lower your tax liability.
4. Step 3: Plan for estimated taxes if applicable. If you are self-employed or have income not subject to withholding, you may need to pay estimated taxes quarterly to avoid penalties.
5. Step 4: File your tax return accurately and on time. After completing the above steps, ensure you file your tax return correctly, claiming all eligible credits and deductions to optimize your tax outcome.