What is Tax Planning?

by Catherine Rein
(last updated April 24, 2009)

As an owner of a small business I've learned that it is important to educate myself on tax strategies and talk to a professional account about tax planning. If you are looking to make smart choices regarding the amount of tax you are required to pay, it makes sense to learn what you can about tax planning.

The goal in tax planning is to minimize your federal income tax liability. There are several strategies around tax planning. The main strategies include postponing income or shifting it to family members. Other versions of tax planning include deduction planning, investment tax planning and year-end planning. These strategies are explained in more detail here:

  • Postpone Your Income. One strategy connected to tax planning is to postpone income to a later year. 401(k) accounts are an example of postponing income tax on your investment until you withdraw your money. This allows you to postpone when you pay taxes on your income and also take advantage of the tax-deferred growth in your investment earnings. If you are self-employed you might be able to delay payment and defer income into the next year.
  • Shift Income to Family Members. If you are self-employed there also are strategies for shifting income to family members with lower tax brackets. Your business can take a deduction for reasonable compensation paid to an employee, which in turn reduces the amount of taxable business income that comes to you as the owner.
  • Other Strategies. Other strategies include boosting retirement account contributions, such as 401(k) contributions, or investing in a 529 plan for college expenses. 529 plans and pre-paid tuition plans are sponsored by states, state agencies or educational institutions. Pre-paid tuition plans lock in future tuition rates while college savings plans are based on market returns. Most 529 plans can be used to attend college in any state no matter which state plan you choose.

You can reduce the amount of estate taxes paid, by establishing a gifting program for your children and grandchildren. You can give gifts of up to $12,000 per year per child (or other individual) or $24,000 if given with a spouse and still be excluded from the gift tax. In 2009, the gift tax exclusion will rise to $13,000.

If you are considering tax-planning strategies, be sure to consult a tax professional for the latest information on income tax laws and requirements.

Author Bio

Catherine Rein


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