From the course: Finance Foundations: Income Taxes
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Strategy 1: Shift income from one time period to another
From the course: Finance Foundations: Income Taxes
Strategy 1: Shift income from one time period to another
- Let's start with the first basic tax planning strategy, shifting income from one time period to another. Let's take a simple example. Suppose you have a small side business where you give music lessons to children. You've earned $1000 giving group clarinet lessons. Do you want to be paid at the end of December of year one or at the beginning of January of year two? Now, think about that carefully because the timing of the reported income for income tax purposes is typically based on when you receive the cash. If you receive payment near the end of December, you must report that on this year's tax return and pay tax on it with the rest of your year one income. But if you delay receiving payment until January of year two, yes you may have to wait a little extra to get your money but you can wait an entire year to report and pay tax on this income with the rest of your year two income. Just by pushing the receipt of cash back a little, from December to January, you pushed your tax…
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