Tax deferral allows a taxpayer to delay paying taxes to a future date. The net taxes paid should be the same in theory. Taxes can sometimes be deferred indefinitely or may be taxed at a lower rate in the future, especially for income taxes.
Corporate Tax Deferral
Corporations can often defer taxes using methods like accelerated depreciation. This reduces current profit taxes by either lowering declared revenue or increasing expenses. Future taxes should be higher as a result.
Income Tax Deferral
Income taxes can be deferred to future periods in various ways. For instance, deductions can delay income recognition to future years, or certain expenses can be deducted now instead of later. In progressive tax systems, where higher incomes are taxed at higher rates, deferring income can lead to lower taxes paid.
Tax-deferred retirement accounts allow individuals to declare income later in life. In Canada, contributions to RRSPs are deducted from income, and earnings in these accounts are not taxed until withdrawal. The U.S. has similar accounts like 401(k)s and IRAs.
Deferring taxes can also apply to business owners who prepay taxes if future tax rates are expected to rise. This can reduce total tax liability by paying higher salaries or bonuses in the current year.
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International Tax Deferral
Taxes on foreign investment profits can be deferred by retaining and reinvesting earnings in low-tax countries. This creates a tax rate advantage and an interest effect, where profits grow faster in low-tax environments.
Even if there is additional taxation upon distribution, investing in low-tax countries can still be more profitable.
Property Tax Deferral
Some states allow senior homeowners to defer property taxes as long as they live in their home. This provides seniors with additional funds for other expenses. Deferred taxes must be repaid with interest, usually when the property is sold or the homeowner passes away.
Retirement Income Problem in the USA
Many retirees do not have enough income to maintain their lifestyle. The National Retirement Risk Index (NRRI) shows that about half of working-age households may not sustain their pre-retirement living standards. This problem affects all income levels.
The need for more retirement resources is driven by longer life expectancies, rising healthcare costs, and low-interest rates. Traditional sources of retirement income, like social security, now provide less support. Social security benefits are reduced due to higher Medicare premiums, increased benefit taxation, and a higher full retirement age. The private retirement system also fails many people due to the lack of universal coverage.
Property Tax Deferral Programs in the USA
Twenty-four states allow certain seniors to defer property taxes until their home is sold or they pass away. Eligibility is based on age, residency, income, and property value. Local governments manage these programs and can adjust eligibility criteria and interest rates.
For example, Massachusetts offers three property tax relief programs for seniors: the Circuit Breaker Tax Credit, Senior Property Tax Exemptions, and the Senior Property Tax Deferral program. These programs provide various forms of tax relief, allowing seniors to postpone or reduce their property tax payments.
Conclusion
Tax deferral lets taxpayers postpone payments to a future date, potentially lowering overall taxes. Corporations and individuals use various methods to delay taxes, such as accelerated depreciation and retirement accounts. Internationally, deferring taxes through low-tax investments can be advantageous. In the USA, property tax deferral programs help seniors manage finances by delaying payments. Despite these benefits, retirees often face challenges maintaining their living standards due to rising costs and inadequate income.
