Ch. 3: Tax Planning Strategies – Flashcards
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What's the goal of tax planning?
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To maximize after-tax wealth and achieve non-tax goals
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To plan taxes effectively, what must you consider?
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All taxes, all parties, and all costs
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What are the three types of tax planning strategies?
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Timing strategies, income shifting strategies, and conversion strategies
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What type of tax planning strategy does this relate to?: Real tax costs or savings are affected by when income is taxed or savings are deducted.
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Timing strategies
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What does present value have to do with timing strategies?
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Tax rates change from year to year
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What does the time value of money concept say?
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A dollar today is worth more than a dollar tomorrow
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Why is a dollar today worth more than a dollar tomorrow?
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Because you can invest the money that you have now
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How do you find the future value of a current cash flow?
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PV * (1+r)^n
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How to you find the present value of a future cash flow?
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FV/(1+r)^n
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If a marginal tax rate is increasing, should you defer or accelerate income?
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You should calculate
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If a marginal tax rate is increasing, should you defer or accelerate deductions?
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You should calculate
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If a marginal tax rate is decreasing, should you defer or accelerate income?
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Defer
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If a marginal tax rate is decreasing, should you defer or accelerate deductions?
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Accelerate
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If a marginal tax rate is staying the same, should you defer or accelerate income?
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Defer
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If a marginal tax rate is staying the same, should you defer or accelerate deductions?
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Accelerate
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What are the limitations of timing strategies?
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When you can't accelerate a deduction without accelerating the cash outflow, you must continue investment in an asset to defer income recognition, and the constructive receipt doctrine
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What is the constructive receipt doctrine?
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Income is realized even if you don't physically have it
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Which tax planning strategy does this relate to?: Tax rates vary across taxpayers and jurisdictions
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Income-shifting strategies
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What are the two general income-shifting strategies?
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Shift income to taxpayers/jurisdictions with lower marginal tax rates and shift deductions to taxpayers/jurisdictions with higher marginal tax rates
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What are the types of shifting transactions that can be employed when using income-shifting strategies?
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Transactions between family members, between owners and their businesses, and across jurisdictions
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Why would parents want to shift income to their children?
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Because their children have lower tax rates
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What is the limitation of shifting income between family members?
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The assignment of income doctrine
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What's the assignment of income doctrine (related-party transactions)?
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Income must be taxed to the taxpayer who actually earns it
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Why might an individual want to shift income to their business?
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It may result in lower taxation of business income
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Why might a corporation want to shift income to an owner?
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To avoid double taxation
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What are the limitations of shifting income between businesses and owners?
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IRS scrutiny of related-party transactions
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What are the limitations of shifting income across jurisdictions?
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IRS scrutiny of transfer pricing, implicit taxes, and negative publicity
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What type of tax planning strategy does this relate to?: Based on the fact that tax rates vary across different activities (certain things are tax-advantaged)
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Conversion strategies
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What is the main conversion strategy used?
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Analyzing alternative investments by comparing after-tax returns
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How are after-tax returns calculated?
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Pre-tax return * (1-MTR)
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What are the limitations of the conversion strategy?
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Specific tax rules and implicit taxes
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What is the business purpose doctrine?
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To be deductible, the business expense must be incurred for the sole purpose of generating income
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What is the step-transaction doctrine?
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If a series of transactions are undertaken, the IRS can collapse them into a single step to decide who's taxed
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What is the substance over form doctrine?
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The substance must be consistent with the form chosen (a gift is a gift and income is income)
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What is the economic substance doctrine?
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Transactions must meaningfully change a taxpayer's economic positions and have a substantial purpose
