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Lowering your taxes is one of the most pressing concerns of business owners and high-earning individuals.
Unfortunately, not everyone has access to a financial consultant or advisor to help them achieve this goal.
Fortunately, there are a number of ways that you can lower your taxes in the Philippines easily — in a legal way of course.
If you’re curious about how to do this, we’ve compiled this guide for you.
What is Tax Planning?
Tax planning is a recurring activity that involves analyzing your current financial status and predicting your financial position in the future.
This allows you to identify any money-saving measures that can be incorporated into your personal and business lives.
You can also consider tax planning as a means of lowering your overall taxable income. This is key to increasing your standard of living while staying within the bounds of the law.
Tax Avoidance vs. Tax Evasion
Tax avoidance and tax evasion are two different concepts, though you might hear these terms being used interchangeably.
Distinguishing the difference between tax avoidance and tax evasion is integral because one is legal, while the other is not.
Tax avoidance is the legal utilization of strategies that help you lower your taxes. On the other hand, tax evasion refers to illegal attempts to pay fewer income taxes.
This involves willful misrepresentation of income in order to pay taxes at a lower rate, failing to file tax returns or pay tax on income, or failing to comply with any tax laws.
Important Tax-related Documents You Need to Keep
If you want to lower your taxes, make sure to keep these documents.
Invoices and receipts
You will need receipts and invoices to support your expenses when you file your income tax returns for the year.
Cash register tape receipts
Your cash register tape receipts contain information about your business’ daily transactions. Make sure not to lose this.
Credit card receipts and statements
Keeping credit card receipts and statements will help you properly report any business and personal-related expenses.
Proof of payment documents
If you are filing income tax returns, remember to keep all of your proof of payment documents. This includes receipts, invoices, and money pay-in slips.
These are the official business and personal accounts that you have with financial institutions. It includes bank account statements, and credit card statements, among many others.
8 Best Practices for Lowering Your Taxes in the Philippines
Here are the best tax planning tips to follow for lowering your taxes in the Philippines.
1. Be honest in reporting your income and expenses
There are a lot of people out there who try to manipulate the system. However, this is illegal and dishonest.
The first step to any tax planning strategy is to be honest in reporting your actual income and expenses to the Bureau of Internal Revenue.
This way, you will not find yourself in trouble for not paying the correct taxes. Considering this, always make sure that your books are in order.
2. Keep records of all your expenses and income
The Bureau of Internal Revenue (BIR) will not accept any of your expense claims if you cannot show proof that you have incurred those expenses.
It’s important to keep records of your income and expenses in order to ensure that you will be able to pay the correct amount of taxes.
3. Keep and maintain your financial documents to make it easier to file your taxes
If you want to make filing your income taxes as easy as possible, you will have to make sure that you are organized.
In order to make it easier to file your taxes, make it a habit to organize your invoices, receipts, credit card statements, and other financial documents.
You will most likely not be able to file your taxes without these documents.
4. Use apps and programs to make accounting easier
Whether you’re an entrepreneur or not, you need to be on top of your finances. This is particularly true if you want to lower your taxes.
There are a lot of apps, programs, an templates out there that can help you make accounting easier.
These programs are very useful in a lot of ways to help you keep track of all your expenses and income, manage your expenses, and even do your taxes.
5. Consider using services that will manage tax-related tasks for you
Managing tax-related tasks can be too much for one person to do. If you don’t have the time and resources to manage everything on your own, consider outsourcing some of your tax-related tasks.
For example, you can consider the help of a financial consultant who can provide you with one-on-one guidance on how you can lower your taxes.
If you want a more affordable alternative, we suggest that you check out Taxumo, a fully automated accounting software that lets you file your taxes in minutes.
For more information, check out this guide.
6. Be mindful of guidelines regarding donations & charitable contributions
Making a donation or charitable contribution is a great way to lower your taxes.
However, you have to double-check on guidelines regarding donations and charitable contributions.
Under the law, this can be deductible under limitation or in full.
Make sure that the institution you donate to is properly documented through Certificates of Donations, among other papers.
The institution should also be certified by NEDA.
7. Consider Optional Standard Deduction
For filing your income tax returns, you have the option to claim the standard deduction.
For OSD, you can declare that 40% of your income is your expense. Therefore, only 60% of your income is taxable.
One major benefit of using OSD is you are free from filing audited financial statements.
8. Declare incurred business losses to BIR to qualify for a deduction
If you want to keep all your income tax deductions, make sure to declare any incurred losses. However, make sure the losses are:
- Related to trade, business, or profession
- Evidenced by closed and completed transactions
- Sustained and written off during the year
- Not compensated by insurance
Tax Violations You Should Avoid
When it comes to taxes, ignorance of the law is not an excuse.
There are a lot of people who think that they will not be penalized if they don’t know about tax laws.
However, the Bureau of Internal Revenue can punish you even if you were proven to violate tax laws.
Here are some tax violations that you should avoid.
Intentionally under-reporting income
This is one of the most common tax violations in the country. You may think that under-reporting your income is the best way to lower your taxes.
However, you can be jailed, or asked to pay penalties and interest fees, among many other consequences.
Keeping two books of account
This can be a red flag since you are misrepresenting your financial records.
If you are doing this, there is a good chance that you will be audited by the Bureau of Internal Revenue.
Falsifying entries in your accounting books
This is done to represent low income and high expenses to give the illusion that you should pay fewer taxes.
If you are caught doing this, you can be charged with fraud.
Tagging personal expense as a business expense
This is done to conceal business-related income, which is a very common tax violation in the Philippines.
Keep in mind that if you purchase a personal item without the intention of using it for business, you cannot claim it as a business expense.
Redirecting income to other accounts to avoid tax reporting
This is done to avoid tax reporting. Redirecting income is illegal and will result in fines and possible imprisonment.
Illegal transactions used as a tax shelter
A tax shelter refers to any arrangement or transaction that is designed to reduce or reduce tax liability.
However, you cannot use illegal transactions for this purpose.
There are individuals out there who manage to get away with illegal transactions because of the discrepancy in the tax laws.
If you are using illegal transactions as a tax shelter, you are committing a tax crime.
Missed tax deadlines
This may sound obvious, but missed tax deadlines is one of the most common tax violations that you should watch out for.
Not paying your taxes on time may result in penalties and interest fees.
Always be mindful of when you should pay your taxes, and make sure to prepare months in advance.
The deadline for filing and payment of your Income Tax Return is every April 15th of each year.
For manual filing, you can submit the necessary documents with the BIR form upon filing.
For those using the Electronic Filing Payment System (EFPS) or eBIRForms, you must file 15 days before the deadline.
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