The purpose of planning a tax strategy on the income you receive is to limit the amount of federal income tax you would otherwise have to pay. There are several ways to do this so you can save your hard-earned money, such as reducing your taxable income, or perhaps deferring income to another tax year, or choosing to shift income to family members in lower tax brackets. Other strategies include investment tax planning, deduction planning, and year-end strategies that reduce your estate’s income tax so you preserve as much of your wealth as possible.
Defer Your Income: By postponing income in the current tax year until a future year, you may be able to reduce your immediate tax liabilities, and also be in a lower tax bracket as well, saving taxes in two ways. An arrangement like this is possible with certain retirement plans, or you may be able to structure the sale of your business so that you receive income from the sale on a schedule.
Shift Income to Family Members: Federal income tax liabilities can also be reduced by shifting income to other members of your family who are in lower tax brackets. You may own a stock that generates a lot of dividend income; when you gift the stock, the tax responsibility is shifted, assuming you don’t exceed the $13,000 ceiling on tax-free gifts. A family limited partnership might also be an appropriate way to shift income so tax liabilities can be reduced. As you realize, there are a number of factors involved when income shifting to family members, including children, in a C corporation, an S corporation, or a Family Limited Partnership. A tax advisor will advise you on the feasibility of these and other tactics, and all the pertinent details you’ll need to know and consider.
Deduction Planning: By claiming all the deductions to which you are entitled, you may be able to significantly reduce your income tax liabilities. In addition, you may be able to control whether a deduction is best placed in one year or another, to provide a greater reduction in your tax liability.
Timing Strategies: By consulting with your financial planner, you will have the benefit of premeditated investment choices that control your vulnerability to taxation. Tax-exempt securities could be a good asset class for you, as well as timing the sale of capital assets. Generally, long-term capital gains (ownership of over one year) are taxed at a lower rate than ordinary income, so holding assets for over a year may contribute to a tax saving. Your financial planner will be indispensable for the value of professional advice he can provide.
Year-End Tax Planning: Because year-end planning is conducted in the last quarter of the year, a more factual tax strategy can be implemented because much of what has occurred during the year is known, or can be anticipated. Your financial planner may now be more precise with recommendations to delay income for subsequent years, and more specific about deductions you should take or delay to limit your estate’s tax exposure.