Apart from being a way to pay a significantly lower amount of tax, tax planning is an important part of financial planning that also helps you utilize your tax savings in the best way possible. With the right tax planning, you stand to gain in more ways than one. Missing out on a tax payment due to lack of funds, or on the flip side, paying more tax than you should, are both undesirable situations for any investor.  

In fact, one of the major objectives of tax planning is to make it an integral part of your financial plan. This allows for a systematic tax planning approach where you can look at your financial goals and pick the tax saving options that are adequate for your portfolio. 

We’ve already spoken about the different ways you can make tax planning in the new year easier and smarter, here’s a look at 10 common mistakes that you should avoid while planning your taxes for 2020. 

1. Procrastinating Till The Last Minute

We’ve all been guilty of doing it at some point in time. But while procrastination may or may not have adverse effects on a lot of situations, when it comes to tax planning, you really shouldn’t be taking any chances. Last-minute tax planning is one of the biggest reasons why many people are unable to take advantage of all the facilities they have to save money. Tax planning is a continuous process that takes place throughout the year, but if you haven’t started already, it’s not too late to start now. A delay in your tax planning can lead to you scrambling for a tax saving investment that may not align with your financial goals. 

2. Not Hiring The Right Financial Planner

There are so many things that can go wrong when you don’t have the right financial planner. And this doesn’t necessarily have to mean that your financial planner is not legitimate or inexperienced. You could hire one of the best financial planners around but it doesn’t mean a thing if they don’t understand you or your financial goals. Always remember that financial planning comes first and tax savings or tax planning falls under it. Avoid taking a shortcut with your money and focus on your financial goals while planning your taxes. 

3. Being Disorganised

If you don’t have all your paperwork filed away carefully, or if you don’t know how much your insurance costs, tax planning could become a little difficult for you. Always have all your documents ready in one place, including all your investment details, especially those that are tax-deductible. If you miss declaring all those when you file your taxes, you could end up missing out on some major savings. 

4. Not Reviewing Your Insurance

With time you’ll change a lot of things in your life; changing your insurance plans when the need arises is basic financial hygiene. An insurance policy that would have been adequate for you and your family 6 years ago will most probably not do the job very well in the present. When you start planning your taxes for the new financial year, make it a point to review your insurance and ensure that you get the best out of your insurance with the maximum tax benefit. 

5. Buying Too Much or Too little Insurance 

Yes, insurance is a good way to be prepared for emergencies and unforeseen circumstances. They are also a good investment vehicle for those looking to reduce their taxes. There is a general tendency to go overboard with insurance; be especially aware if you’re buying ULIPs with lock-in periods. On the flip-side, buying too little insurance and paying a high premium is only going to do more harm than good for your financial portfolio in the long run. Not only is there a limit to how much of your insurance amount can be deducted from your taxable income, paying numerous premiums can gradually increase the pressure on your finances as well. 

6. Failing To Monitor Your Portfolio

This is financial planning 101. If you’re not aware of what’s happening to your investments, then be prepared for unwanted surprises when you sit down to file your taxes. Allocating money in a scheme and them realizing just before you file your taxes that you can’t even claim a deduction on it isn’t really a situation you’d like to be in. Keep reviewing your portfolio regularly, and take help from a certified financial planner to figure out the best way to reduce your tax costs. 

7. Keeping Your Planner Unaware 

Your financial planner is not a psychic or a magician. Without the right information, there’s no way your planner can create a plan that helps you achieve your financial goals. If you haven’t told your financial planner about all your investments and expenses, chances are, they have created a plan that won’t consider those factors. There is a lot more beyond your standard 80C deductions that could be very vital and useful information for them. Make sure you provide them with ALL the required information or you might be left with is a plan that, according to your financial planner, is perfect to keep your taxes as low as possible but you’ll actually end up with a plan that may do more harm than good. 

8. Casually Missing Deductions

A lot of people don’t even know that they can claim tax deductions for a range of investments. More often than not, people just aren’t aware of any tax benefits apart from 80C. If you’re unsure whether your investments are tax-deductible, or if you don’t know where all you can claim a tax deduction, get in touch with a certified financial planner or wealth management firm. They will help you identify areas where you can save taxes and take advantage of the deductions offered by the government.

9. Having No Idea About Lock-in Periods

Just like financial planning is not only about money, tax planning isn’t just about taxes. It’s about helping you reduce your tax burden without compromising your financial goals and needs. Whenever you make an investment that is geared towards helping you save taxes, make sure you don’t put yourself in a situation where you can’t access your money if you really need it. Many investments have a lock-in period where you can’t withdraw or use the money you’ve put aside for a certain period. Don’t put yourself in a situation where you end up saving tax but fall into trouble with your other expenses. 

10. Relying Heavily On FDs 

Putting all your money in FDs is the most common and potentially the most hazardous financial advice you could ever get. Sure, FDs are safe, and they are tax-deductible up until a certain limit. Beyond that, there’s absolutely no reason for you to invest in an FD if you don’t want to. Not only will you get lower returns in comparison to something like an ELSS scheme, but you also won’t be able to claim the entire amount for deduction or have ready access to capital when you need it. 

While tax planning is important, keep in mind that too much tax planning is also not good. Consult a certified financial planner or wealth management firm to help you identify places where it would be better to pay tax and put your money in high-return investments as well.