What is a tax deferral?

A tax deferral is essentially a postponement of tax payment to a future date. This concept allows taxpayers to delay their tax obligations on certain income or gains, meaning they don’t have to pay taxes on that income until a later date. This can be beneficial because it allows individuals or businesses to potentially invest those funds or keep them for other uses in the interim, rather than having to pay taxes immediately.

For example, contributions to certain retirement accounts often qualify for tax deferral; individuals can put money into the account without paying taxes on those contributions until they withdraw the money in retirement. This strategy is useful for tax planning, as it may lead to a lower tax liability in the current year and allow for growth on investments without the immediate tax burden.

The other choices do not accurately define tax deferral. A reduction in taxable income relates to deductions or credits that lessen the overall income subject to tax, an increase in tax rate refers to a rise in the amount of tax owed based on income levels, and a type of tax credit is a direct reduction of tax owed, not a postponement of payment. Therefore, the correct understanding of tax deferral focuses solely on the aspect of delaying tax payments.