Tax Tip of the Week
900 N. Kings Highway, Cherry Hill, New Jersey 08034
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Fax: 856.667.3652
For the week of
July 24, 2000
Tax savings: Tax-deferred, or tax-free?
There is a fair amount of confusion about the tax benefits
of certain tax planning techniques. Some people refer to tax-free when they mean tax-deferred, or maybe there is
an actual reduction in tax rather than just a deferral of the tax to a later date.
Perhaps you can shift income from this high-bracket tax year to a lower tax bracket next year. For example, $10,000
taxed at the 28% bracket rather than in the top rate of 39.6% will save you $1,160. This shifting results in a
permanent tax savings.
Tax-deferral, although less beneficial than permanent tax savings, could have two advantages. The first may be
the shifting of income into a lower tax bracket. The second is the use of the tax dollars until some future date.
If you can postpone the payment of $3,960 of tax (39.6% x $10,000), you can enjoy the investment income from that
money until such time as the tax becomes due. This is what happens when you arrange a tax-deferred exchange of
real estate. This is often mistakenly referred to as a tax-free exchange. The tax-free aspect means that it is
tax-free in the year of the exchange, but tax is due when you ultimately sell the asset you took in the exchange.
Tax-free, on the other hand, is just what it says. If you avoid the tax altogether, you are ahead permanently.
This would be the case, for example, with the interest income from tax-free municipal bonds.
If you would like assistance with your tax planning, please contact us. If you are not a current client of the
firm, call anyway. We will gladly assist you.
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and current tax information.
The information contained in this site is of a general nature and should not be acted upon in your specific situation
without further details and/or professional assistance.
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