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Simple English definitions for legal terms
tax planning
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A quick definition of tax planning:
Tax planning is when someone tries to pay the least amount of taxes possible by using the tax law. This means looking at their money situation and finding ways to pay less tax. They might do this by timing when they get paid, when they buy things, or by choosing certain retirement plans or investments. Tax planning is legal and is not the same as tax evasion or fraud. It's just a way to control how much tax someone has to pay so they can keep more of their money.
A more thorough explanation:
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 bracket in 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.