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Tax planning often results in substantial tax savings. Tax planning primarily concerns the timing and the method by which income is reported and deductions and credits are claimed. The basic strategy for tax planning is to time your income so that it will be taxed at a lower rate and to time your deductible expenses so that they are claimed in a year when you are in a higher tax bracket. This usually means that, if you expect to be in a lower tax bracket in the following year, you should defer the receipt of income and accelerate your deductions. Conversely, if you expect to be in a higher bracket in the following year, you should accelerate your income and defer your deductions. There are three rules of tax planning: - Recognize income when your tax bracket is low.
- Pay deductible expenses when your tax bracket is high.
- Postpone tax whenever possible.
All of this involves planning around your tax bracket. The most direct control you have over your tax bracket is your ability to control the timing of your income and deductible expenses. However, you should also be aware of more indirect factors that can change your tax bracket from one year to the next. These factors also present tax planning opportunities. |
