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15 Cards in this Set
- Front
- Back
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What is the main goal of tax planning?
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To maximize after-tax wealth while achieving non-tax goals.
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Three ways to tax plan
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1. Timing
2. Income shifting 3. Conversion |
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Time Value of Money Strategy
-________ Income -________ Deductions |
-Minimize (Minimizes Taxes)
-Maximize (Decreases income which decreases taxes) |
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Strategies when tax rates are constant...
-______ Income -______ Deductions |
-Defer Income (recognize in a later year because based on time value of money it's worth less at a later time so you will be paying less in taxes based on TVM)
-Accelerate Deductions (Deduct in an earlier period so that decreases the amount of income you're being taxed on... TVM) |
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Limitations to Tax Planning
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1. Non-tax costs: penalties, need cash
2. Constructive Receipt Doctrine 3. Realization Concept 4. Assignment of Income Doctrine 5. Business Purpose Doctrine 6. Step Transaction Doctrine 7. Substance over form. |
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Realize versus recognize
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There has been a transaction
versus claiming it on your tax return because it is in your pocket and you are aware of it |
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Constructive Receipt Doctrine
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You must recognize the income if it is (1) available, (2) you are aware of it and (3) there are no restrictions on spending or receiving it
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Realization Concept
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Taxpayer only recognizes income after its realized
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Assignment of Income Doctrine
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Earned income is taxed to taxpayer providing the service and income from property is taxed to individual who owns it.
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Arms Length Transaction
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Both parties are negotiating in good faith for themselves and it assumes that economic reality exists with this transaction.
(not considered arms-length when there is a related party) |
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Business Purpose Doctrine
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To be deductible, the expense must be related to generating income.
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Step Transaction Doctrine
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If there are a series of transactions undertaken, the IRS will look at the outcome of everything in order to determine the liability.
Collapse all of the steps and look at the total. |
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Substance over Form.
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Tax generally follows the legal form of the transaction. Debt is debt. Salary is salary.
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Conversion
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Conversion is changing the form of income/deduction from one type to another.
Tax law treats different types of income and deductions differently. -Salary-->MTR -Muni Bond Income-->No tax |
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Limitations on conversions
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Investment expenses that are used for purposes of generating exempt income are not allowed
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