The Considerations of Loans on Tax Planning

Importance of Tax Planning

Tax planning is a very important aspect of our lives. We are all obligated to pay taxes; however, there is so much more to paying taxes than just paying the taxes. We need to properly plan and analyze our financial situation so that we can efficiently calculate our taxes. Tax planning is the process of analyzing your financial situation or plan to minimize your tax liability. There are a number of factors which you must take into consideration if you want your tax planning to be successful. These include: the timing of income and expenditures and the selection of investments. Debts also play a major role in tax planning as the interest paid or receive can positively or negatively affect your taxes.

Loan Considerations in Tax Planning

Debts or loans which are an obligation to repay borrowed money can impact federal taxes in different ways so it is important that they are taken into consideration in the process of tax planning. Loans affect the taxes of both the borrower and the lender. The borrower pays interest on the loan and that interest may be deducted from their taxes. The lenders on the other hand need to report the interest that they earned from a loan as an income and as a result, they may need to pay taxes on that income.

Effects of the Different Types of Loans on Tax Planning

There are many types of loans; however, the common factor in every type of loan is the fact that you will need to pay interest and that interest amount is generally tax deductible. 


Business Loans

In the business world, interest paid on loans are expenses which can be deducted from your final profit and loss. Interest expenses decreases your profit which determines the amount of taxes that you need to pay. The lower your profit amount, the less taxes you will need to pay. Interest paid on credit cards and overdrafts are also deductible if the overdraft and credit card are used only for business purposes.

Personal Loans

Persona loans can be a bit tricky as the interest paid on the loan is not always deductible. The interest is only deductible if it is a qualifying loan. What exactly is a qualifying loan? It is a loan that is used by an individual to:

Purchase shares in a business in which you own a minimum of 5 percent of the shares

Lend money to a business in which you own a minimum of 5 percent of the shares

To buy shares in a limited company in which you are a full time employee

Options to Aid Tax Planning

It is understandable that you might not be able to effectively plan your taxes because you do not have the knowledge and expertise needed to properly and effectively execute tax planning. You have not been trained in the tax laws so it is advisable that you look into options to aid tax planning. You can turn to independent financial advisers or tax consultants to provide you with the guidance and the advice that you need in order to execute proper tax planning. They will analyze your current financial situation and look for the best possible ways to minimize your tax liability. In addition, they have specific knowledge on specific methods that can be legally used to minimize the end amount of your taxes.

The Role of the Government

Whether you hire an adviser or consultant to assist you with your tax planning or you attempt it on your own, it is very important to be aware of the role of the government and how government changes to tax can affect that amount of taxes that you need to pay. The government determines the level of taxes that you need to pay in a direct and indirect manner. Indirectly, they can affect the tax level by being considerate of how they spend the country’s money and directly, they decide the actual tax percentage that you need to pay. You need to be aware of all the tax regulation changes made by the government so that you can take them along in your tax planning.

One Important Loan Consideration on Tax Planning

One very important loan consideration that will definitely have a major effect on the amount of taxes that you need to pay is to consolidate loans with non-deductible interests into loans with deductible interest amounts such as home equity loans. This is a process known as debt consolidation. By taking out a home equity loan with deductible interest, you can pay off all of your debts with non-deductible interest amounts leaving you with only one loan to repay for which the interest is deductible.

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