What is Tax Planning?

Written 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

MORE FROM CATHERINE

Protecting Your IRA Investments

Remember that IRA investments are for retirement. If you try to tap the funds before retirement age, the IRS will impose ...

Discover More

Life After Identity Theft

Millions of Americans are affected every year by identity theft. The reality is that it has become easier for thieves to ...

Discover More

What is the Inheritance Tax?

The people receiving the inheritance pay an inheritance tax. Each beneficiary is responsible for paying his or her own ...

Discover More
More Money Tips

What is the Inheritance Tax?

The people receiving the inheritance pay an inheritance tax. Each beneficiary is responsible for paying his or her own ...

Discover More

When Are Taxes Due?

Taxes are a pain and especially when you end up doing them last minute. But how do you know if you're doing them last ...

Discover More

What is a Tax Credit?

Whenever the subject of taxes comes up, most people begin to immediately think of ways that they could lower either what ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] (all 7 characters, in the sequence shown) in your comment text. You’ll be prompted to upload your image when you submit the comment. Maximum image size is 6Mpixels. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is 8 - 8?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)