Tax financial planning is the strategic process of optimizing a person’s financial affairs in a way that maximizes all legitimate deductions, exemptions, allowances, and rebates, ultimately resulting in a minimized tax liability. Tax planning is not to be confused with tax avoidance, which involves recommending strategies that violate current tax laws. A smart financial professional is always working to find ways to reduce a client’s tax liability without putting them in violation of the law.

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Reducing taxable income is one of the most effective tax planning strategies. This can be done through investment in tax-free vehicles like municipal bonds, maximizing retirement contributions, deferring capital gains, selling properties in installments and arranging for like-kind exchanges. It can also be accomplished by bunching deductions, a strategy that involves timing charitable donations or other deductible expenses to exceed the standard deduction threshold in one year and obtaining a larger benefit for those contributions than would otherwise be obtained if they were spread out over several years.

Another common tax planning strategy is to transfer assets or income into trusts to lower their exposure to taxes. For example, transferring investments to a family-limited partnership can lower the taxpayer’s taxable income by shifting income from higher tax brackets into lower ones.