Tax Planning Chapter 11 “Tax Awareness” (the key)

Tax Planning It’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 § 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. § Requirements Meaning - TP must currently be employed, and is going to stay in that employment

Tax Planning Reg. § 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 ?