PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 9. Quick Planning Guide

Because most individuals are cash basis taxpayers (paying tax only on the income they actually receive before year‐end and claiming deductions for any deductible amounts they pay before year‐end), you probably have more opportunity to implement year‐end tax‐planning strategies than you previously thought. Before the year closes, taxpayers have an opportunity to take actions that can cut taxes this year. To utilize year‐end strategies, a taxpayer should have a good idea of his or her tax picture for this year, as well as a good estimate of what it will likely be in the coming year. Changing tax rules make year‐end planning more complex. Changes for the coming year, including new rules and inflation adjustments, must be factored in to any decisions.

How do you determine which strategies are best for you? The best year‐end tax‐saving strategies produce the largest overall tax savings, taking 2007 and 2008 into account. There are three basic techniques, and in combination, the following techniques can produce sizable tax savings:

1. Tax reduction.

2. Tax deferral.

3. Income shifting.

Tax Reduction

Tax reduction occurs when you take action that results in paying less tax than would otherwise have been due. The savings produced by implementing tax‐reduction strategies are permanent savings (they are not timing differences that shift a tax burden to another year). For example, if you switch funds from a taxable investment (e.g., a corporate bond) to a municipal bond that ...