tax planning
Strategically managing financial decisions to minimize tax liability within the law.
Example
“Tax planning including retirement contributions and timing of capital gains saved him $6,000.”
Memory Tip
PLANNING — legal tax reduction. Every dollar saved in taxes is a dollar invested.
Why It Matters
Tax planning helps individuals and families keep more of their earned money by legally reducing the amount of taxes owed to the government. By making strategic financial decisions throughout the year, people can increase their wealth and financial security without breaking any laws.
Common Misconception
Many people mistakenly believe that tax planning is the same as tax evasion or is somehow illegal. In reality, tax planning involves using legitimate strategies allowed by tax law, while tax evasion is illegal fraud that can result in serious penalties.
In Practice
A person earning $80,000 annually might contribute $6,500 to a traditional IRA to reduce their taxable income to $73,500, saving approximately $1,430 in federal taxes at the 22 percent tax bracket. They could also strategically time the sale of investments that lost value to offset gains, or donate to charity, all of which are legal ways to lower their overall tax bill.
Etymology
From Latin 'taxa' meaning charge plus Latin 'planus' meaning clear — a clear strategy to reduce tax.
Common Misspellings
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See Also
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