All your incomes aren't the same! There are different types of income, and each has its distinct financial characteristics.
When it comes to tax planning, I typically group them into the following four types:
➤ Taxable Income
➤ Tax-Free Income
➤ Tax-Deferred Income
➤ Tax-Sheltered Income
Understanding these characteristics is very important for optimizing your tax strategies.
Let's delve into it.
Type #1 - Taxable Income
Taxable income includes wages, salary, commissions, rents, interest, dividends, and royalties.
Minimizing your taxable income directly reduces the amount of taxes you owe.
Strategies to Reduce Taxable Income:
➤ Maximize your tax deductions: Increasing deductions directly reduces your taxable income. Common deductions include business expenses, depreciation, and interests.
➤ Maximize your tax credits: Unlike deductions, which merely reduce your taxable income, tax credits directly reduce your tax bill, dollar for dollar.
Type #2 - Tax-Free Income
Tax-free income is any income not subject to federal or state income taxes. This includes municipal bond interest and certain fringe benefits or types of insurance premiums.
Type #3 - Tax-Deferred Income
Tax-deferred income isn't taxed in the current year but will be taxed in the future. Saving taxes from deferred income is considered an "interest-free" loan from the government. The goal is to delay it as long as you are legally allowed, increasing your current cash flow to reinvest into your business.
Type #4 - Tax-Sheltered Income
Tax-sheltered income is any income not taxable due to specific provisions in the tax code. This includes gifts, inheritances, life insurance proceeds, and certain disability payments. Tax-sheltered income can provide financial security and reduce your overall tax burden.
A Comprehensive Approach to Tax Planning
Effective tax planning requires:
① Understanding the different income types
② Employing strategies to minimize taxable income and maximizing tax-free, tax-deferred, and tax-sheltered income.
Remember that tax planning is an ongoing process.
Stay informed about the tax laws and update your tax strategies accordingly
... and no, you don't have to do it alone. We will work with you to develop a customized tax plan that minimizes your tax liability and maximizing your wealth.
We're located in Houston, Texas, and serve clients throughout the surrounding areas.