Income Tax Planning
Tax fundamentals
Know the difference between marginal and average tax rates, and how progressive brackets work. Understand gross income, adjustments (above-the-line), the standard or itemized deduction, and taxable income. Capital assets produce short-term gains (ordinary rates) or long-term gains (preferential rates) based on the holding period.
Deductions and credits
Deductions reduce taxable income; credits reduce tax dollar-for-dollar, so a $1,000 credit is worth more than a $1,000 deduction. Know common itemized deductions (mortgage interest, state and local taxes subject to caps, charitable contributions) and above-the-line adjustments (retirement contributions, HSA, student loan interest).
Timing strategies
Tax planning shifts income and deductions across years: accelerating deductions and deferring income when rates fall, and the reverse when rates rise. Understand basis, like-kind exchanges, and the step-up in basis at death.
Worked example
A taxpayer in the 24% bracket earns an extra $1,000. Tax owed rises by $240 (marginal rate). A $1,000 deduction saves $240; a $1,000 credit saves $1,000. This distinction is a frequent exam trap.
Traps
Watch for phase-outs of deductions and credits, the difference between refundable and nonrefundable credits, and the treatment of capital losses (limited to $3,000 against ordinary income, with carryforward).