This post discusses different strategies that can potentially help a business owner become more tax efficient. Some methods include the restructuring of a business and establishing tax-deductible retirement plans.
The concept of characterization of income (or shifting of income) may result in the preservation of significant wealth. One method of shifting of income is through retirement planning. Another method is the restructuring of a business entity.
If the taxpayer is working and participating in a 401K with his employer, or he has an IRA, meaning it’s funded entirely by the taxpayer, the money that goes into such accounts may save him on taxes.
When the taxpayer puts money in such plans, he decides that instead of paying taxes now, he will instead pay taxes when he take those funds out, preferably when his tax brackets are likely to be reduced at his retirement. That’s because his total taxable income is likely to be lowered since he is no longer working, thereby lessening his income tax obligations.