PricewaterhouseCoopers 2008 Guide to Tax and Financial Planning

Chapter 11. Deferring Income

Deferring income from one year to the next can be a very effective tax‐planning strategy, especially for those in high tax‐rate brackets, as they will save the most. Many two‐income families will find themselves in marginal tax‐rate brackets between 28 percent and 35 percent, which makes the tax benefits from deferring income quite meaningful. Almost all individuals report their income and deductions using the cash method of accounting (i.e., income is reported in the year it is actually or constructively received, and expenses are deducted in the year they are paid), which provides quite a bit of flexibility when using tax‐deferral strategies.

The key to saving from income deferral is that income is not taxed until it is actually or constructively received. For example, if a taxpayer does work for others, he or she will not be taxed until the year in which payment is received. So deferring billing at year‐end results in more income being received and taxed in the following year. Some examples of situations in which income deferral may be useful are discussed later.

Caution

Individuals must be aware of possible alternative minimum tax (AMT) issues if they lower their income too much by using deferral techniques (see Chapter 12 for a discussion of the AMT).

Observation

Income deferral is even more valuable when income tax rates are scheduled to drop from one year to the next. Deferring income to a lower tax year not only delays payment of tax but also lowers ...