Tax Strategy Cheat Sheet

The core ideas of Tax Strategy distilled into a single, scannable reference — perfect for review or quick lookup.

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Quick Reference

Tax-Loss Harvesting

The practice of selling investments at a loss to offset capital gains, thereby reducing taxable income. The losses can offset gains dollar for dollar and up to $3,000 of ordinary income annually, with remaining losses carried forward to future years.

Marginal Tax Rate

The tax rate applied to the last dollar of taxable income within the progressive tax bracket system. It differs from the effective tax rate, which is the average rate paid across all income.

Tax Deferral

A strategy of postponing tax payments to a future period, typically through contributions to qualified retirement accounts or like-kind exchanges. Deferred taxes allow money to grow without immediate taxation.

Roth Conversion

The process of transferring funds from a traditional IRA or 401(k) to a Roth IRA, paying income taxes on the converted amount now in exchange for tax-free growth and withdrawals in the future.

Standard Deduction vs. Itemized Deductions

Taxpayers choose between a fixed standard deduction amount set by the IRS or itemizing specific deductible expenses such as mortgage interest, state and local taxes, and charitable contributions, whichever produces the greater tax benefit.

Capital Gains Tax

A tax on the profit realized from the sale of a non-inventory asset. Long-term capital gains (on assets held over one year) are taxed at preferential rates of 0%, 15%, or 20%, while short-term gains are taxed as ordinary income.

Entity Selection

The strategic choice of business structure (sole proprietorship, LLC, S-corp, C-corp, partnership) based on how each entity type is taxed, including self-employment tax treatment, pass-through income, and corporate double taxation.

Qualified Business Income Deduction (Section 199A)

A deduction allowing eligible self-employed individuals and small business owners to deduct up to 20% of their qualified business income from pass-through entities, subject to income thresholds and business type limitations.

Estate and Gift Tax Planning

Strategies to minimize taxes on wealth transfers during life and at death, utilizing the lifetime exemption, annual gift exclusions, trusts, and other mechanisms to preserve wealth across generations.

Tax Credits vs. Tax Deductions

Tax credits directly reduce the amount of tax owed dollar for dollar, while deductions reduce taxable income. Credits are generally more valuable because they provide a direct offset against the tax bill.

Key Terms at a Glance

Adjusted Gross Income (AGI):Total gross income minus specific above-the-line deductions such as retirement contributions, student loan interest, and alimony payments.

Alternative Minimum Tax (AMT):A parallel tax calculation that limits certain deductions and exemptions to ensure taxpayers above certain income levels pay at least a minimum amount of tax.

Capital Gains:Profit realized from the sale of an asset such as stocks, real estate, or bonds, classified as short-term (held one year or less) or long-term (held more than one year).

Cost Basis:The original value of an asset for tax purposes, used to calculate capital gains or losses upon sale. Adjusted for stock splits, dividends reinvested, and improvements.

Deduction:An expense that can be subtracted from gross income to reduce taxable income, either as a standard deduction or through itemized deductions.

Depreciation:The tax deduction for the gradual loss in value of a business asset over its useful life, spreading the cost over multiple tax years.

Effective Tax Rate:The average rate at which income is taxed, calculated by dividing total tax paid by total taxable income.

Estate Tax:A tax on the transfer of the estate of a deceased person, applied to the value of assets exceeding the lifetime exemption amount.

Filing Status:The classification used to determine tax rates and standard deduction amounts: Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Surviving Spouse.

Gift Tax:A tax on the transfer of property from one individual to another while receiving nothing or less than full value in return.

Health Savings Account (HSA):A tax-advantaged savings account for individuals with high-deductible health plans, offering deductible contributions, tax-free growth, and tax-free medical withdrawals.

Itemized Deductions:Specific expenses that taxpayers can claim instead of the standard deduction, including mortgage interest, state and local taxes, charitable contributions, and medical expenses.

Like-Kind Exchange:A tax-deferred exchange of investment or business property for property of a similar nature under Section 1031 of the Internal Revenue Code.

Marginal Tax Rate:The tax rate applied to the last dollar of income earned, reflecting the highest bracket into which a taxpayer's income falls.

Net Investment Income Tax:A 3.8% surtax applied to investment income for taxpayers with modified AGI exceeding certain thresholds.

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