Tax Planning

Chapter 11

Tax Awareness
(the key)

Tax Planning Its legitimate

. there is nothing sinister in so arranging ones affairs as to keep taxes as low as possible. nobody owes any public duty to pay more than the law demands: taxes are enforced extractions, not voluntary contributions (Justice Learned Hand, Comm. vs. Newman, 159 F.2d 848 [CA-2, 1947]).

Tax Planning The objective

optimization

Tax Planning and Professionalism

Tax Avoidance

Our objective Legitimate Legal Intent to defraud Illegal Unrelated to a professional practice

Tax Evasion

Tax Planning

Open transaction

Not yet completed Practitioner maintains some degree of control A done deal; transaction completed Practitioner can only clean up the mess

Closed transaction

Tax Planning An anomaly

The costs are deductible

By a business as a business related expense

By individuals on page 2, but is of limited use and value due to page 2 deduction limitations

The benefits are non-taxable This result is derived because the tax/tax saving itself is not deductible/taxable

Tax Planning - Rates What we have to work with

Proportional tax rate - XXXX Regressive tax rate - XXXX Progressive tax rate Marginal tax rate subjects rate bracket Nominal Average tax rate actual tax liability / taxable income Effective tax rate actual tax liability / total income

Tax Planning Fundamentals

Avoid Income Recognition Postpone Income Recognition Change Tax Jurisdictions Control the Classification of Income Spread Income Among Related Taxpayers

Tax Planning Remember the Client

Must tailor to meet Clients

Business or Profession Financial situation Personal matters or desires

Tax Planning Beware of the Traps

Statutory Tax Traps 482 In any case of two or more organizations, trades, or businesses Owned or controlled by the same interests, the Secretary may distribute, apportion, or allocate gross income, deductions among such organizations, trades, or businesses is necessary to prevent evasion of taxes or clearly reflect income . (emphasis mine)

Tax Planning Beware of the Traps

(contd)

Judicial Tax Traps Business purpose Concept of Substance over Form

What you do speaks louder than what you say Collapsing several transactions into several steps of a single transaction

Step-transaction Doctrine

Tax Planning Examples????

Loss property Gain property Fringe benefits Frequent flyer miles Charitable contributions (no strings)

Gain property

Tax Planning Examples (contd)

Postpone/accelerate deductions Types of investment property Personal property taxes, charitable contributions, interest, etc. Need cash? Borrow v. other sources Accrue salary Salary, rent, interest, v. dividend beware of reasonableness

Tax Planning Examples (contd)

Passive losses beware IRAs Accelerate income recognition when

Remember Bankers Life great initial thinking (but poor follow through

Offshore

Tax Planning Examples (contd)

Employee v. Independent Contractor Hobby v. Business Dependants/Relatives

Examples

Michael Jordan Owens Family Ballaergent Ford Others ???

Tax Planning Summary

Again, Tax Awareness is the key But also remember the client

Must tailor to clients

Business or profession Financial situation Personal matters/needs

Postgraduate Education Expense Deduction

Reg 1.162-5 Requirements must be incurred to

Maintain or improve skills required in profession or Meet the express requirements of employer, or Required by employer as a condition to retain present employment, status or salary

Tax Planning Reg. 1.162-5 Requirements

Meaning - TP must currently be employed, and is going to stay in that employment

Tax Planning Reg. 1.1625

But, in spite of meeting previous, requirements all is for naught if

If the education is required to meet the minimum requirements qualification in the TPs occupation, or It will qualify the TP for a new trade or business.

But Looking Further ..

The Journal of Accountancy, June 2002, .

Was in a business Away for a temporary period Intended to return within a reasonable period Intended to return to the same profession, trade, or business. Will be considered as having continued his/her employment, thus, as having been employed

Questions