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What is Deferred Tax?

Money set aside in a retirement plan is generally subject to deferred taxes upon withdrawal.
Businesses may utilize deferred taxes by computing depreciation on assets over several years.
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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 August 2014
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The deferred tax is a bookkeeping term that helps to account for the difference between the value of a liability or an asset and the amount of tax that is due on it. A tax situation of this type may come about for several different reasons, including temporary circumstances that help to put off or defer the payment until a later date. Evaluating the current status of assets and liabilities is a common part of the tax planning and projection functions associated with both the management of personal finances and the accounting process for businesses and other entities.

For individuals, a tax payment may be deferred for assets that are set aside for the retirement years. Many governments around the world allow citizens to place a portion of their earned annual income into approved retirement plans and delay paying taxes on that portion of the income until the funds are withdrawn at a later date. Using an approved deferral may help with the amount of income tax due for the current filing period, depending on the amount of income that is deposited into the retirement plan.

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Businesses often use a deferred tax model to help effectively ease taxation on capital gains earned during the tax period. The delayed taxation may have to do with incremental depreciation of fixed assets held by the company, allowing the business to claim a portion of the depreciation over several years. This effectively creates a deduction that can be used to partially offset any capital gains realized by the business during the current tax period.

Another example of how a deferral may take place has to do with claiming losses that minimize the amount of tax due for the current period, assuming the loss has to do with bad debt the company is carrying. While this situation defers taxes for the current period, any amount of the bad debt collected in a subsequent period will be subject to taxation at that time.

The exact requirements for claiming any type of deferment will vary, depending on the country of jurisdiction. Individuals and businesses should always check with accounting and tax professionals to determine if any changes in the existing tax codes have created or eliminated a tax deferral relevant to current arrangement of assets and liabilities. Doing so will help make it possible to claim a deferred tax when appropriate.

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latte31
Post 2

Subway11-I also know that annuities are another form of a tax deferred asset. Annuities are investments made with insurance companies that guarantee a certain rate of return that is usually a little better than most savings accounts and CD rates.

They offer a schedule of payments that you receive at retirement which is why many seniors look for these types of investments. However, these investments are taxable upon withdrawal, but at the senior’s current tax rate.

subway11
Post 1

A deferred tax asset is a deferred tax liability that you will have in the future. A perfect example of deferred tax liability involves the use of retirement accounts.

Traditional Individual Retirement accounts and 401k is among the tax deferred assets that many Americans share.

For example, these retirement account balances grow every year with no tax penalty. The taxes are paid at the point of withdrawal which is done when you reach eligible retirement age or at least 59 ½. The taxes would be assessed at your current tax rate.

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