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By Stephen J. Kahn, CPA 

Tax planning generally involves six basic tax reduction techniques. As you might expect, with thousands of pages of tax law, there are numerous variations and combinations of these techniques. What follows are the basic six:

  1. Shifting income to years when your tax bracket is lower.
  2. Shifting deductions to years in which will you generate the greatest tax savings.
  3. Splitting income among family members to take advantage of lower tax rates.
  4. Deferring the tax liability on gains until a later date.
  5. Converting ordinary income into long-term gain to be taxed at a lower rate.
  6. Investing in tax-exempt transactions.
Before shifting income or tax deductions from one year to another, do an estimate of your current-year tax situation and a projection for at least two future years. Be sure to take the time value of money into consideration in your planning.

Splitting income among family members can be a little tricky. You want to maximize the use of the lower tax brackets with the best overall use of the family funds both now and in the future. The ages of your children and their knowledge of finances will enter into the equation.

There are several techniques for deferring gains until later tax years. You can invest in securities which grow in value (appreciate) but produce little, if any, current taxable income. Another technique is to arrange a tax-deferred exchange of investment or business property.

Perhaps the most common example of converting ordinary gain (subject to regular tax rates up to 38.6%) into long-term gain (taxed at 15% maximum) is holding onto an investment for more than the required 12 months.

Your current and projected tax brackets will be the best indicators of your need to invest in tax-exempt securities. Obviously, the higher your tax bracket, the larger the benefit of having tax-free investments.

Tax laws are constantly changing. Please contact our office at 703.899.5246 or email us at taxsavings@kahncpa.com if you would like assistance finding your best tax-cutting strategies.

(Stephen J. Kahn is a Certified Public Accountant and an Alexandria resident. The reader is cautioned that this information may not be applicable to the reader's specific circumstances or needs. The reader should contact a tax professional prior to taking any action based upon this information. Stephen J. Kahn, CPA assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information herein.)


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