What Are the 5 Pillars of Tax Planning? 2023

Everyone would love to find ways to pay less taxes, but just deciding to do so could land you in trouble with the IRS. Because of this, many people look for ways to increase their net worth by maximizing the amount of money they can keep through strategic, and legal, ways to pay less taxes each year. When you can do this year after year, you can compound the amount of money you can keep in your pocket.

The ways in which you can accomplish this fall into one of the five pillars of tax planning. Understanding each of them, and how to implement them, can empower you to make the right decision on how to minimize your tax payments. Let’s look at each of the five pillars to make sense of which one might be right for you.

Some of these pillars may seem illegal at first glance, but they are all legal avenues that could bring you tremendous long-term savings on your taxes.

Deducting

This is pretty common. It is the act of simply claiming the deductions and credits that you are entitled to so that you can move beyond the standard deduction. This works by multiplying your deduction amount by your marginal tax rate (MTR), which will determine the amount of taxes you save. As an example, if your MTR is 50 cents, and your deduction is $1000, then you will save $500 in taxes.

If, however, you apply for a tax credit, then your tax savings will be the same equivalent dollar amount. Using the same $1000 amount, if that is the amount in tax credits, then you will save $1000 in taxes. Credits are calculated as a percentage of qualifying disbursements. Disbursements could include medical expenses or donations that you made, among other types, or as dictated by tax law.

Deferring

This process takes a tax bill that you have and pushes it to a future tax year, effectively eliminating the immediate need to pay it. One benefit of this is that you can invest or save money that earns interest and could later be used to pay the bill. For example, you owed $1000, and you decided to defer the bill. Depending on the return rate, you could invest half that amount, or $500, today and let the return on your investment build to $1000 in time for you to pay the bill. This means that you essentially paid half the bill because you were able to use the gains you earned to reach the payment amount.

Dividing

This process takes your income and spreads it out to others, such as family members, so that taxes are essentially split among more people. This will push your income into lower tax brackets, which will save you tax dollars. This could be an effective strategy for those who wish to file separately rather than jointly. In some cases, filing jointly will split the income between both spouses and then divide the owed taxes in half.

Disguising

This doesn’t involve tricking the IRS; it’s more about classifying some income in different ways to change how it is taxed. An example of this can be seen when comparing interest income with capital income. Capital income is generally taxed at a lower rate. By reclassifying the type of income or finances that the money is, you can change the taxation placed upon it, sometimes by almost half.

Dodging

This isn’t as bad as it sounds. For some of your income, you may be able to structure the income so that it doesn’t appear on your taxes. This essentially creates a cash flow that is tax-free. Don’t let the name of this confuse you with tax evasion. It is a perfectly legal process that you can easily take advantage of.

FAQs

Q: What Are the 5 Pillars of Tax Planning?

A: The five pillars of tax planning are:



1. Deducting
2. Deferring
3. Dividing
4. Disguising
5. Dodging

Each of these pillars represents legal opportunities that you could use to save money on your taxes each year. As you save money on your taxes, you can increase your overall net worth by keeping more funds in your pocket. While their names may allude to illegal actions, they are perfectly within the bounds of the law.

Q: How Can I Reduce Tax Liabilities in 2023?

A: One way that you can reduce your tax liabilities in 2023 is to maximize your contributions to your retirement account. Not only will most employers match these contributions, but increasing your contributions can also reduce your tax liability. Other ways include contributing to a health savings account or donating to a qualified charitable organization.

Q: What Are the 3 Basic Tax Planning Strategies?

A: Tax planning is not something many people take advantage of, but it could offer many benefits when you consider a long-term strategy. The three basic strategies that can help you include:

1. Planning the timing of your income
2. Planning the timing of your purchases
3. Planning for other expenditures

The balance of income and expenditures means that you could have income in one tax year and expenditures in another to even it out.

Q: How Do I Claim a Vow of Perpetual Poverty?

A: To claim a vow of perpetual poverty, you are likely adhering to a religious order as a religious leader or administrator. To claim this, you must claim your earned income, and any pension benefits are turned over to the religious organization with which you are affiliated. You can then claim perpetual poverty because you are turning over all your finances to a religious organization.

Get Your Tax Answers From Outsourced CFO Solutions, Inc.

If you are looking for ways to save on your tax filings, get advice from knowledgeable and professional CFO services and tax strategists who can help guide you through the options to determine which may be right for your situation. Contact Outsourced CFO Solutions, Inc. today and let our team help answer your questions. We want to help you gain a greater financial future.

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