Final answer:
The tax planning strategy that relies on the understanding that different types of income and deductions are taxed differently is tax avoidance, which is legal and contrasts with illegal tax evasion. This involves using strategies like income splitting and investing in tax-efficient options to lower tax bills.
Step-by-step explanation:
The tax planning strategy that is based on the understanding that the tax law does not treat all types of income and deductions the same is tax avoidance. This strategy involves organizing financial affairs using legal methods to minimize the amount of tax one has to pay. This often includes making use of deductions, exemptions, and choosing to receive income in a form that is taxed at a lower rate. Unlike tax evasion, which is illegal, tax avoidance is a lawful way to reduce one's tax liabilities. Tax avoidance can involve various approaches, such as income splitting among family members to utilize lower tax brackets, investing in tax-efficient accounts, or choosing investments that offer tax benefits. Companies also have the flexibility to adopt technologies or business structures that may result in lower tax obligations, though these decisions may be influenced by tax laws imposed by state or local governments.