TaxPlanning 2 TAXPLANNING TaxplanninginthetaxpracticeFundamentaltenetsTaxrateterminologyTaxplanninggoalsAvoidingtaxtrapsTaxmotivatedloans 3 TaxPlanningintheTaxPractice 1of2 ClientgoalsmustbebroadlystatedPractitionercanbemorecreativeHighdegreeofcontrolinopenfactpatterns 4 TaxPlanningintheTaxPractice 2of2 Typesoftax wealthplanningTaxCashRiskEducationRetirementInvestmentEstate 5 FundamentalTenets TaxesareanadditionalcostofdoingbusinessoraccumulatingwealthIncentivesfortaxplanningFed incometaxnotdeductibleFullamountoftaxsavedincreasesafter taxincome taxsavingsnottaxable TaxplanningisdeductibleATC BTCx 1 MTR 6 TaxRateTerminology Taxliabilitiesshouldmeetrevenue nonrevenueobjectivesofthetaxsystem TaxLiability TaxBasexTaxRate 7 TaxBase 1of2 IncometaxBasedonordinarytaxableincomelessdeductionsforbusiness certainpersonalexpendituresReflectscapacitytosupportgovernmentfinance 8 TaxBase 2of2 WealthtaxesLeviesagainstnetholdingsoftangible orintangible assetsthatarecontrolledbyataxpayeratagiventimeAlsoreflectscapacitytosupportgovernmentfinance 9 TaxRates TaxratestructuresProportionalProgressiveRegressiveTypesoftaxratesMarginalAverage 10 ProportionalTaxRate Taxrateisconstantfortheentiretaxbasee g sales propertytaxes 11 ProgressiveTaxRate TaxrateincreasesastaxbaseincreasesAdditionalincometaxedatincreasinglyhigherratese g income estate gifttaxes 12 RegressiveTaxRate TaxratedecreasesastaxbaseincreasesAdditionalincometaxedatincreasinglylowerratesSocialsecuritytaxSocialsecuritytax 0 over 80 400in2001 13 MarginalTaxRate Usedindecision makinganalysisNominalmarginaltaxrateTaxrateonnextdollarofincomeperthetaxrateschedulesEffectivemarginaltaxrateActualtaxrateonnextdollarofincomeafteraccountingforphase outprovisions limitations 14 AverageTaxRate NominalaveragetaxrateTaxliability taxableincomeEffectiveaveragetaxrateTaxliability economicincome 15 TaxPlanningGoals FundamentalsoftaxplanningAvoidingincomerecognitionPostponingincomerecognitionChangingtaxjurisdictionsControllingclassificationofincomeSpreadingincomeamongrelatedtaxpayers 16 FundamentalsofTaxPlanning PresentvalueconsiderationsDelayincomerecognitionAcceleratedeductionsMarginalrateconsiderationsShiftincometolowrateyearsShiftdeductionstohighrateyears 17 AvoidingIncomeRecognition 1of2 AvoidingtaxabletransactionsGrowingone sownfoodUsingdebtBorrowagainstappreciatedassetsinsteadofsellingthemUsingdebttoformanewcorporation 18 AvoidingIncomeRecognition 2of2 UsingstatutoryexclusionsMunicipalbondinterestNontaxablefringebenefitsinsteadofadditionalsalary 19 PostponingIncomeRecognition Delayingamarkettransaction incomerecognition GrowthratherthanyieldinvestmentsMismatchcurrentexpenseswithunrealizedrevenuesUsingcostrecovery 20 ChangingTaxJurisdictions Structuringtaxpayersandtransactionstotakeadvantageof LackofauniversaldefinitionofthetaxbaseDifferingtaxrates ratesystems 21 ControllingClassificationofIncome 1of2 ClassificationsOrdinaryincomeCapitalgainsPortfolio investment incomePassiveincomeAMTincome 22 ControllingClassificationofIncome 2of2 GeneratingtherightkindofincomepassiveincomewherepassivelossesexistGeneratingtherightkindofdeductionsAMTdeductionswhereAMTincomeexists 23 SpreadingIncomeamongRelatedTaxpayers ShiftincomefromhighratetaxpayerstolowratetaxpayersTransferincome producingassetstochildrennotsubjecttothekiddietaxUseofcontrolledcorporationsFringebenefits salarypolicies 24 AvoidingTaxTraps 1of2 Statutorytaxtraps 482ReallocateincomeartificiallyshiftedamongrelatedtaxpayersKiddietaxPassivelossrulesAMT 25 AvoidingTaxTraps 2of2 JudicialtaxtrapsBusinesspurposeTransactionsmusthavesomepurposeotherthantaxavoidanceSubstanceoverformStep transactiondoctrineStepsneedabusinesspurposeSeparatestepsbyareasonabletimeperiod 26 TaxMotivatedLoans Low interestloansGovernedby 7872GiftloansCompensation relatedloansCorporation shareholderloansExceptionstoimputed interestrulesHigh interestloans 27 GiftLoans BetweentwoindividualsStep1InterestincometolenderInterestexpensetoborrowerStep2GiftmadebylenderGiftreceivedbyborrower 28 Compensation RelatedLoans EmployerloanstoemployeesStep1InterestincometolenderInterestexpensetoborrowerStep2CompensationexpensetolenderCompensationincometoborrower 29 Corporation ShareholderLoans Corp sloanstoshareholdersStep1InterestincometolenderInterestexpensetoborrowerStep2DividendpaidbylenderDividendincometoborrower 30 ExceptionstoImputedInterestRules 1of2 Aggregateloansupto 10 000NointerestimputedunlessGiftloanproceedsusedtopurchaseincome producingassetsEmployer employeeloanhastaxavoidanceasprincipalpurposeCorporation shareholderloanhastaxavoidanceasprincipalpurpose 31 ExceptionstoImputedInterestRules 2of2 Aggregateloansupto 100 000LoansbetweenindividualsInterestimputedtotheextentoftheborrower snetinvestmentincome NII ifborrower sNIIexceeds 1 000Imputeallinterestiftaxavoidanceisprincipalpurpose 32 High InterestLoans Shiftincomeamongfamilymembers orotherrelatedparties AnyamountofinterestisdeductibleifactuallypaidIRSmayreclassifyloanasgiftunlessthereisalegallyenforceablewrittenagreement