What does tax deferment entail?

Tax deferment refers to the postponement of tax liability to a future date. This means that instead of paying taxes owed in the current period, the taxpayer is allowed to delay the payment until a later date, which can provide some immediate cash flow relief and enable better financial planning.

This concept is commonly seen in specific tax-advantaged accounts like retirement plans, where contributions may lower current taxable income, allowing individuals to defer taxes until they withdraw funds in retirement. During the deferment period, the taxpayer benefits from any potential growth on the funds that would otherwise have been paid as taxes.

The other options do not accurately describe tax deferment. Immediate payment of taxes constitutes a different approach to tax liability, and the elimination of tax is not a characteristic of deferment but instead implies non-liability, which isn't relevant to the concept. Lastly, the taxation of previous years' income does not apply to the idea of deferring taxes but rather indicates a tax obligation that has already been incurred and needs to be addressed.