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Tax Planning: Definition & Examples

Tax planning is a term that many people ask during tax season. There are several different strategies that you can use for tax planning, and each one will depend on your specific situation. But what is tax planning exactly?

Tax Planning Definition

Tax planning is a process that individuals and businesses use to reduce their tax liability. You can follow this process by taking advantage of tax deductions, credits, and other strategies. Tax planning can also help you defer tax payments or even avoid them altogether.

Understanding Tax Planning

Tax rules can be complicated but the impact can be massive. In a progressive tax system like the United States where the highest income. According to a CNBC statistic, tax planning is the reason why the richest 400 Americans are able to pay a lower tax rate than the bottom 50% of Americans.

Common forms of tax planning for Americans are charitable deductions, pre-tax investment accounts and charitable trusts (Phil Knight has given ~$890m of Nike stock to charitable trusts for the tax advantages).

Here are some techniques our business develops, that might help your tax planning:

  • Deferring the taxes on unrealized investment gains:
  • CRUTs: Defer taxes on unrealized capital gains up to the length of your life
  • Opportunity Zones: Defer taxes on unrealized capital gains until 2026 and avoid capital gains taxes on appreciation in real estate investments in government specified areas
  • Reducing the taxes on already realized income such as salary or capital gains
  • Grantor Charitable Lead Annuity Trusts (CLAT) – estimate your savings here

Other commonly used solutions include:

  • Exchange funds: Which are a common way for executives to diversify their holdings of a publicly traded stock without ‘selling’ shares. However, exchange funds typically carry annual costs between 1% – 1.5% of the assets you put in.
  • Donor Advised Funds (DAF): These are a common way for people to charitably give appreciated assets and receive a tax break. However, unlike a CLAT you won’t receive any money back from the fund while receiving an equal tax break.
  • Conservation Easements: Congress allows an income tax deduction for owners of significant property who give up certain rights of ownership to preserve their land or buildings for future generations. This does require a significant amount of overhead.
  • There are many other solutions ranging from the common and simple such as tax deductions to the less common and more complex oil and gas investments that carry write-offs that we won’t cover here.

Strategies for Tax Planning

Tax planning is a process that can save individuals a lot of money on their tax bills. There are some different strategies that you can use, and each one will depend on your specific situation.

One of the most common ways to reduce your tax bill is to take advantage of tax deductions. A tax deduction reduces the amount of income that is subject to tax. Therefore, you will pay less tax on your taxable income.

There are several different tax deductions that you may be able to take, and each one will depend on your circumstances. Some of the most common tax deductions include:

– home mortgage interest

– state and local taxes

charitable contributions

– medical expenses

Another way to reduce your tax liability is to take advantage of tax credits. A tax credit reduces the amount of tax you owe dollar for dollar. This means you can save a lot of money by taking advantage of tax credits.

There are many different tax credits that you may be able to take, and each one will depend on your circumstances. Some of the most common tax credits include:

– the child tax credit

– the earned income credit

– the American opportunity credit

– the lifetime learning credit

Taxes Examples

One way to reduce your tax bill is to contribute to a retirement account. Contributions to a retirement account are tax-deductible, meaning you will pay less tax on your taxable income.

Also, as we previously mentioned, another way to reduce your tax liability is to take advantage of tax credits. 

For example, one of the most common tax credits is the child tax credit. The child tax credit is worth up to $1,000 per child, and it is available for children who are 16 years old or younger at the end of the tax year.

Parents and grandparents can claim the child tax credit, which is available for children who are adopted or living with their parents in a foster home.

Next Steps

As your goals and financial situation change, so does the right solution. Our goal at Valur is to democratize knowledge about these solutions and to make the planning process seamless so that everyone can take advantage of the best wealth-building solutions for them.

Explore our tax planning tools to take the most advantage of your investments. Get started with our calculators. Or access our previous definitions to know more!

About Valur

We built a platform to give everyone access to the tax and wealth-building tools of the ultra-rich like Mark Zuckerberg and Phil Knight. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures so you can build your wealth more efficiently at less than half the cost of competitors. From picking the best strategy to taking care of all the setup and ongoing overhead, we make it easy and have helped create more than $500m in wealth for our customers.