13.3 - Tax Planning Flashcards
What are the 4 roles of tax planning?
- Assist individuals and businesses in reaching maximization of after-tax wealth in the most tax-efficient way possible
- Considering alternative treatments
- Projecting tax consequences
- Determining role of taxes in decision making
Identify the 3 basic types of tax planning?
- Timing of income recognition
- Shifting of income among taxpayers and jurisdictions
- Conversion of income among high and low rate activities
Define “timing” of income recognition as a form of tax planning
- Accelerates / defers recognition of income and /or deductions
What is the purpose or goal of accelerating / deferring recognition of income and/or deductions?
- Results in lowest tax liability for the CY
What 3 items should be considered in the timing of income recognition?
- Time value of money
- Can taxpayer make a higher return?
- Future tax law
- Individual circumstances of the taxpayer
Identify the types of “shifting” transactions that take place as a form of tax planning
- Moving income between entities and their owners
- Shifting income from one jurisdiction to another with different marginal tax rates
- Moving income and the tax liability from one family member to another who is subject to a lower marginal rate
Define an arm’s length transaction
- Occurs when involved parties act independently, regardless of relationships
What is the purpose of an arm’s lenth transaction
- Guarantee all parties act in their own self-interest and not for common good of all parties to IRS detriment
Identify 3 shifting determinants
- Income / assets available for shifting
- Best strategy for realizing the shift
- Best recipient of income / asset within the family or entity
How does “shifting” occur in jursidiction shifting?
By the following:
- City
- County
- State
- Country
- Internal / business encouraged by each country given credit for tax paid to the other
Define “conversion” as a form of tax planning
- Converting ordinary income property into capital gain property
- Converting property to non-taxable property
Provide examples of converting property to non-taxable property as part of a conversion tax plan
- Investing in municipal bonds
- Convert nondeductible personal expense to a business expense
- Employee benefits
Define tax avoidance
Minimization of tax liability through legal arrangements & transactions
When does tax avoidance normally take place?
- Take place prior to incurring a tax liability
Identify 5 actions that constitute tax evasion
- Understatement of income
- Improper allocation of income
- Claiming of fictitious deductions
- Questionable conduct of the taxpayer
- Accounting irregularities