Chapter 11 Tax Planning

1
Chapter 11Tax Planning

• Client Goals must be broadly stated and effected
• Practitioner can be more creative
• High degree of control is available over the tax
  effects of open transactions

2
Tax Practice

• Tax planning
• Tax compliance
• Tax research
• Tax litigation

3
Planning Activities

• Tax planning
• Cash planning
• Risk planning
• Education planning
• Retirement planning
• Investment planning
• Estate planning

4
Tax Rate Structures

• Progressive
• Proportional
• Regressive

5
Tax Rate Structures

• EXAMPLES
• Income 10 20 30
  
• Proportional Tax 3 (.3) 6 (.3) 9 (.3)
• Progressive Tax 3 (.3) 7 (.35) 12 (.4)
• Regressive Tax 3 (.3) 5 (.25) 6 (.2)

6
Tax Rate Computations

• Marginal Rate
• Rate at which an additional of income is taxed
• Nominal average Rate
• Tax liability / Taxable income
• Effective average Rate
• Tax liability / Economic income
• Only marginal rate should be used in the
  decision-making analysis

7
Tax Rate Computations

• Example TP is single, 1999 taxable income
  130,250, tax exempt interest 20,000
• Marginal Rate
• 36
• Nominal average Rate
• 35,156.50/130,250 27
• Effective average Rate
• 35,156.50/150,250 23.4

8
Tax Planning Goals

• Avoiding Income
• Growing or constructing own assets
• Using debt (loan proceeds rather than sale)
• Using exclusions (municipal bond interest)
• Postponing Income
• Growth rather than yield investments
• Deferred compensation
• Accelerate deductions (cost recovery)
• Installment method

9
Tax Planning Goals

• Classifing Income
• PIGs for PALs
• AMT deduction if AMT applies
• Income Shifting
• TPs in lower tax brackets (children 14 or over)
• Controlled corporations (fringe benefits and
  salary policies)
• Shifting jurisdictions
• Take advantage of different tax bases, tax rates,
  and rate systems in different jurisdictions

10
Tax Planning Goals

• Other optimizers
• Accelerate income when NOL CFs
• Defer deductions when higher rates coming
• Exploit inconsistencies in tax law
• Fringe benefits are deductible by payor and
  excludible by recipient
• Tax awareness is more important to constructing
  an effective tax plan than is a mastery over
  technical details

11
Avoiding Tax Traps

• Sec. 482
• IRS can reallocate income among taxpayers
• Substance-over-form
• Step-transaction doctrine