tax planning chapter 11 “tax awareness” (the key)
TRANSCRIPT
Tax Planning
Chapter 11
“Tax Awareness”
(the key)
Tax PlanningIt’s legitimate “…. there is nothing sinister in so
arranging one’s 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
Tax Evasion Intent to defraud Illegal “Unrelated to a professional practice”
Tax Planning Open transaction
Not yet completed Practitioner maintains some degree of
control Closed transaction
“A done deal;” transaction completed Practitioner can only clean up the
mess
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 – subject’s 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 Client’s
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 (cont’d)
Judicial Tax Traps Business purpose Concept of Substance over Form
“What you do speaks louder than what you say”
Step-transaction Doctrine “Collapsing” several transactions into
several steps of a single transaction”
Tax Planning – Examples???? Loss property Gain property Fringe benefits Frequent flyer miles Charitable contributions (no
strings) Gain property
Tax Planning Examples (cont’d) 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 (cont’d) Passive losses – beware IRAs Accelerate income recognition –
when Remember Banker’s Life – great initial
thinking (but poor follow through Offshore
Tax Planning Examples (cont’d) 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 client”s 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. §1.162-5 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 TP’s 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
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