Oregon Broker PSI Practice Exam

What does tax deferral refer to?

1. Paying taxes in installments

2. Delay in paying taxes to a later date

3. Reduction of tax liability

4. Immediate payment of taxes owed

The correct answer is: Delay in paying taxes to a later date

Tax deferral specifically refers to the practice of postponing the payment of taxes to a future date. This means that rather than paying taxes in the current tax period, the obligation to pay those taxes is delayed, allowing the taxpayer to use those funds or investments for other purposes until the tax becomes due. This concept is common in various financial and investment strategies, where individuals or entities can defer taxes on earnings or gains until a later time. For instance, certain retirement accounts allow individuals to contribute pre-tax income and defer the payment of taxes until they withdraw the funds during retirement, often at potentially lower tax rates. The other options do not accurately reflect the meaning of tax deferral. Paying taxes in installments refers to a method of payment rather than postponing the tax debt itself. Reducing tax liability pertains to legitimate deductions or credits that lower the amount of tax owed but doesn't imply a delay. Immediate payment of taxes owed contrasts directly with the idea of deferring payment, as it necessitates settling tax obligations right away.