Chapter 4 Basic Maxims of Income Tax Planning

 Income Shifting  Arrange transactions to transfer income from a high tax rate entity to a low tax rate entity or from a high rate tax year to a low tax rate year.  Deduction Shifting  Arrange transactions to transfer deductions from a low tax rate entity to a high tax rate entity or from a low rate tax year to a high rate tax year.  Assignment of Income Doctrine prohibits shifting of income from property UNLESS the property is transferred also.  Income shifting during periods of changing rates may compete with general tax deferral maxim.

 Because income is reported only once a year, the tax paid or tax savings from any transaction depends on the year the transaction occurs.  In present value terms, tax costs decrease (and cash flows increase) when a tax liability is deferred until a later taxable year. Limited by:  Opportunity Costs  Tax Rate Changes

 Opportunity Costs  Shifting tax liabilities to a later period also may entail shifting income to a later period. Thus, the opportunity costs of shifting the income may be greater than the tax savings associated with the liability deferral.  Tax Rate Changes  If taxpayers defer a tax liability to a future date and Congress increases tax rates the benefits of the deferral may be lost or substantially limited.