There are actually several basic tax-cutting strategies, and most plans involve one or a combination of them. Generally, the strategies are:
- Splitting income among several family members or legal entities in order to ensure that income is taxed in lower brackets.
- Shifting income from one year to another in an effort to see that it is then taxed at a lower rate.
- Shifting deductions from one year to another to place them where the tax benefit will be greater.
- Deferring tax liability through certain investment choices and through pension plan contributions.
- Structuring your affairs to obtain a tax deduction for expenses paid for things you enjoy — a vacation home, for example.
- Investing your money to produce income that is exempt from either federal or state income tax or both.