Managing Tax Liability To Create Wealth
There are 3 methods that can be legally used in tax planning.
- Avoiding Taxes-use of exclusions, credits and certain deduction to legitimately reduce taxes.
- Deferring Taxes-does not produce a permanent reduction in taxes but reduces current taxes.
- Conversion-converting highly taxed income into more favorably taxed income.
Tax planning is fundamental to financial planning. The objective of financial planning is to structure financial affair's so that the result is the greatest accumulation of wealth possible. The less money paid in taxes the more money one has working towards increasing their wealth. Two investments with the same amount of return pre-tax will not necessarily net the same amount of after tax return thus reducing the amount of money working toward wealth accumulation. Using legitimate methods to reduce taxes, defer them or avoid them all together should be discussed with your advisors to make sure the optimal strategy is taken.
Understanding the tax rules on capital gains, both short and long term, and income such as interest and dividends are key to developing the appropriate strategy.