Tax Chapter 3 Midterm

Front 1

What are the 3 Tax Planning Strategies

Back 1

1. Timing
2. Income Shifting
3. Conversion

Front 2

What are the three parties that every transaction includes?

Back 2

The taxpayer
the other transacting party
the government

Front 3

Astute Tax Planning

Back 3

Understanding the consequences of all transaction and understand tax rates.

Front 4

Timing Strategy

Back 4

WHEN income is taxed or expense is deducted affects the associated real tax cost or saving.

It might be an additional tax cost in one part of the transaction but it can reduce your overall tax.

Front 5

The timing strategy involves the time value of money concept.

Back 5

A dollar today is worth than a dollar tommorow. A discounted Cash flow model.

Front 6

Cash inflows ______ present values are preferred

Back 6

Higher

Front 7

Cash outflows ______ present values are preferred

Back 7

Lower

Front 8

Present Value Formula

Back 8

= Future Value/(1+r)^n

Front 9

Future Value Formula

Back 9

= Present Value x (1+r)^n

Front 10

Two types of Annuities

Back 10

1. Ordinary Annuity
2. Annuity Due.

Front 11

Tax Deductions Strategy When Rates are consistent.

Back 11

Accelerate Tax deductions into earlier years because it Maximizes the present value of tax savings from deductions.

Front 12

Taxable Income Strategy When Rates are consistent.

Back 12

Defer taxable income into later years in order to minimize the present value of taxes paid.

Front 13

Timing Strategy when tax rates are increasing

Back 13

Calculate the optimal tax strategies. You have to take it into a case by case basis.

Front 14

When Tax Rates Decrease

Back 14

Taxable income should be deffered into later years
Tax deductions should be in earlier years.

Front 15

Limitations to the timing strategy

Back 15

1. You have to continue your investment to defer income recognition for taxpayers
2. Deferal May not be optimal.

Front 16

What are 3 reasons why Deferal Is not optimal regarding the timing strategy

Back 16

1. The Taxpayer has sever cash flow needs
2. Continuing the invsement souwl general a low rate of return compared to other investments.
3. the current investment would subject the taxpayer to unnessesary risk.

Front 17

Constructive Receipt Doctrine

Back 17

Restricts income defferal for cash method taxpayers. You have to recognize the income when it come through.

Front 18

Income shifting Strategies

Back 18

Tax Rates can also vary across Taxpayers or Jurisdictions.

Front 19

Examples of Income shifting strategies

Back 19

you can shift income to another person who has a different tax rate.

You can shift income to another state with a different rate.

Front 20

Related parties

Back 20

Family members or business partners

Front 21

Jurisdiction

Back 21

Operating in multiple locations

Front 22

Whats the difference between an arms length transaction and related party transaction

Back 22

in an arms length transaction two parties are negotiating for their own benefit. In a related party transaction the two are colluding against the irs.

Front 23

What could offset the tax advantages of moving money across borders?

Back 23

Demand for labor services and property would all cost more money to take across the border.

You may inflict negative publicity for movign operations across borders.

Front 24

Conversion Strategies

Back 24

Recasting your income and expenses for faborable tax treatment. You must be aware of the differences in tax treatment.

Front 25

Business purposes Doctrine

Back 25

Allows IRS to challenge and disallow business expenses without business motivation

Front 26

Step Transaction Doctrine

Back 26

Allows IRS to collapse related transactions into one transaction to see what they did to save on taxes.

Front 27

Substance over form Doctrine

Back 27

Allows IRS to reclassify a transaction regardless of form and reclassify it.

Front 28

Economic substances doctrine

Back 28

1. Taxpayer must have a meaningful impact on the persons economic position
2. Taxpayer must ahave a substantial purpose (other than tax avoidance)

Front 29

Smell test

Back 29

If it smells bad than use a doctrine

Front 30

Difference between tax avoidance and tax evasion

Back 30

Tax avoidance is ok and actually encouraged.
Tax evasion is attempting to defraud the government.