What Is the Purpose of Tax Planning? How Do We Conduct Tax Planning? How Could Tax Planning

What is the purpose of tax planning? How do we conduct tax planning? How could tax planning lead to unethical behavior?

Tax planning helps a taxpayer maximize the dollars he or she can take out of an income, whether from a business or from employment. The purpose of tax planning is to have the most efficient matching of the timing and method by which a taxpayer's income is reported and his or her deductions and credits are claimed (CCH, 2007, p. 11). Thus, tax planning aims to create a tax strategy wherein income are declared when they are taxed at the lowest income tax rate and deductibles claimed when the taxpayer is in a higher income tax bracket.
In this regard, to meet its objectives, tax planning must be done systematically. Specifically, in conducting tax planning a systematic analysis of the differing tax options available to the taxpayer for income and deductions including tax credits in current and future periods must be made (Siegel & Shim, 2006, p. 722). In other words, tax planning involves the identification of tax saving opportunities such as realizing long term capital gains instead of short term as the latter is taxed at a higher rate, earning qualifying dividends which are subject to the tax rate levied for long term capital gains, and earning tax free income such as interest income from municipal bonds among others (Lasser, 2009, p. 502).
Tax planning therefore is in a fine line between what is ethical and legal to that that is unethical and illegal tax practices. Tax planning could lead to unethical behavior if the context of the planning is tax avoidance rather than tax minimization. Tax avoidance is the outright refusal to pay income taxes on income earned. Unethical behavior as regards tax planning can also result if the taxpayer creates 'bogus' tax entities such that income tax liabilities are minimized. This is more tax creativity than tax planning. Ethical tax planning means working within the law even if it means paying a little more in tax.
In spite of the many opportunities to engage in unethical practices, tax practitioners must at all times abide by their profession's code of ethics. This is regardless of the perception that unethical behavior is necessary for success in tax practice (Sakurai & Braithwaite, 2003, p. 375).
References
CCH (2007). Tax Planning Strategies: Tax Savings Opportunities for Individuals and Families. New York: CCH.
Lasser, J. K. (2009). J.K. Lasser's Your Income Tax 2010: For Preparing Your 2009 Tax Returns. New Jersey: John Wiley & Sons.
Sakurai, Y. & Braithwaite, V. (2003). Taxpayers' perceptions of practitioners: Finding one who is effective and does the right thing? Journal of Business Ethics, 46 (4), 375.
Siegel, J. & Shim, J. (2006). Accounting Handbook (3rd ed). Boston: Barron's Educational Series.