Why delay taxation?
The answer is simple – the time value of money and tax-deferred compounding. If you can control when you take an item of income, delaying the recognition until after year-end will delay paying the tax until April 15th of the following year. The most common instance where this applies is deciding to take a capital gain on a stock in December or January. Delaying until January can let you earn interest on the amount you will pay in tax for an additional 11 or 12 months. IRAs and qualified retirement plans are other tools that let you defer taxation and earn extra money on what you would have otherwise paid in taxes until you withdraw the funds. Tax favored treatment Wages, dividends, interest and most other types of income are taxed at normal rates. However, the tax law has special provisions for long-term capital gains and interest on bonds issued by state and local municipalities. For stocks owned for more than one year, the maximum tax rate on the gain is 15% compared with the normal
