Legal Definitions - tax planning

Tax planning is a legal way for taxpayers to pay the least amount of taxes possible by analyzing their financial situation. It involves manipulating the timing of income, purchases, selecting retirement plans, and investing accordingly to maintain the taxpayer in a certain tax bracketin order to reduce the amount of taxes to be paid.

• Delaying the sale of an asset until the next tax year to avoid paying taxes on the capital gains in the current year.
• Contributing to a retirement plan to reduce taxable income.
• Claiming deductions for charitable donations or business expenses.

These examples illustrate how taxpayers can use tax planning to legally reduce their tax liability. By delaying the sale of an asset, the taxpayer can avoid paying taxes on the capital gains in the current year and potentially pay a lower tax rate in the next year. Contributing to a retirement plan reduces taxable income, which can lower the taxpayer's tax bracket and reduce the amount of taxes owed. Claiming deductions for charitable donations or business expenses can also reduce taxable income and lower the taxpayer's tax liability.