In today’s show, we tackle the first of the Big 3 tax planning strategies that you need to be aware of. As a refresher, here are the three basic tax planning strategies:

  1. Timing (deferring or accelerating taxable income and tax deductions)
  2. Income shifting (shifting income from high to low tax rate taxpayers)
  3. Conversion (converting income from high to low tax rate activities)

Timing strategies are very, very valuable. In essence, we’re trying to figure out when to take income and when to take deductions to get the most optimal experience.

You need to understand the present and future value formulas to do your calculations appropriately.

Future Value: FV = PV x (1+r)n

Example of investing $100 at 10% interest for one year: FV = $100 x (1+.10)1 (FV is $110)

Present Value: PV = FV / (1+r)n

Example of what receiving $100 in one year is worth today: PV = $100 / (1+.10)1 (PV is $90.91)

The essence of tax planning then is to calculate if we’d rather pay taxes today or in the future. We do that with a timing strategy by either accelerating income or deferring income and by accelerating deductions or deferring deductions.

If tax rates are constant:

  1. accelerate tax deductions into earlier years
  2. defer taxable income into later tax years

If tax rates are increasing:

  1. you must calculate whether to accelerate or defer tax deductions
  2. you must calculate whether to accelerate or defer taxable income

If tax rates are decreasing:

  1. accelerate tax deductions into earlier years
  2. defer taxable income into later tax years

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