Tax reduction is not a single strategy. It is a coordinated playbook: timing income, shifting to lower brackets, converting to Roth at the right moment, harvesting losses, donating appreciated stock, and sequencing retirement withdrawals, and planners assemble that playbook year by year for every client.
Every tax reduction strategy falls into one of four categories:
- Timing: accelerate/defer income and deductions
- Conversion: change income character from higher-taxed to lower-taxed
- Shifting: move income to a lower-bracket taxpayer
- Reduction: permanently eliminate tax through exclusions, credits, or deductions
HIGH-FREQUENCY: The four-category framework organizes scenario questions. Classify any strategy into one of these buckets.
Defer income to future low-bracket years. Accelerate deductions into current high-bracket years. A consultant expecting retirement next year delays invoicing until January. A high-bracket taxpayer prepays state estimated taxes and charitable contributions before December 31.
Limitation: the constructive receipt doctrine. You cannot refuse to cash a check that arrived in December and claim the income belongs to January.
After the standard deduction increase ($16,100 single, $32,200 MFJ), many taxpayers alternate between itemizing and standard.
Common mistakes
- Converting to Roth in a high-income year. A conversion that pushes from 24% to 35% destroys value. Conversions work in low-income years, the gap between retirement and RMDs, sabbaticals, business loss years. Trap: $200,000 conversion when taxable income is already $300,000.
- Forgetting the wash sale rule when harvesting. Repurchasing the identical security within 30 days (in either direction) disallows the loss. Trap: claiming the full loss when the same fund was bought 20 days later.
- Donating short-term appreciated property at FMV. The FMV deduction applies only to long-term property. Short-term: deduction limited to basis. Trap: $15,000 deduction for stock held 3 months (correct: $10,000 basis).
Bottom line
- Four strategy categories: Timing, Conversion, Shifting, Reduction
- Shifting requires the source to move: the assignment of income doctrine taxes the earner or the property owner, so redirecting a payment alone shifts nothing
- Roth conversions are most powerful in low-income years: fill lower brackets without spilling into the next. No income limit, cannot be reversed
- Donate long-term appreciated securities: avoid the 23.8% gain AND claim the FMV deduction (30% AGI limit)
Exam shortcut
When a question asks for the "most tax-efficient" strategy, calculate the marginal rate at which each saves or costs tax. A Roth conversion at 12% preventing future 24% RMD saves 12 cents per dollar. A charitable stock donation avoiding 23.8% LTCG plus generating a 35% deduction saves nearly 59 cents per dollar. Remember: "FILL the bracket" for Roth conversions.
The full lesson (about 3,131 words, 21 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- E.40
Browse all free CFP lessons or jump into free CFP practice questions.