What is tax planning, and how is it related to savings and investment planning? Tax planning involves evaluating your current and projected earnings and developing strategies that can legally___ and/or_ your tax liability. As it is currently written, the U.S. tax code recognizes several types of taxable income, including: Active,or ,_income Passive income Portfolio, or ,___income Tax-deferred and/or tax-free income Tax planning is closely related to savings and investment planning, because tax-reducing strategies often involve the use of tax-deferred or tax-free investments Tax-free investments are so called because the interest or other income paid to their owners is federal, and, perhaps, state taxes. Owners of tax-deferred investments, on the other hand, are allowed to paying taxes on any returns generated by the investment.

Tax planning is a measure to control the tax liability in a legal and effective manner, which does not lead to any misconduct and also ensures that the person in concern have to pay the least tax possible.

As per US Internal Revenue Code, ordinary income is the income which is charged to tax at ordinary rates, that is income other than the capital gains, as capital gains are chargeable at some specified rates.

Investment incomes are income earned through investments, these days to reduce the tax burden many investments which provide exemption or deduction in tax liability, because of investment in that security, or the income earned through that investment is exempt or deducted from gross total income. Therefore, investment and savings are closely related to the tax planning.