Chapter 1: Intro To Income Tax Planning Flashcards
Income Tax
What are the functions of the income tax system
-produce revenue
-manage the economy (effectuate fiscal policy & encourage desired behavior)
-social function (redistribution of wealth)
-regulatory function (discourage undesirable activities)
What is the tax structure
Tax base, tax rate & incidence of tax
Tax base
Amount to which tax rate is applied
Tax Rate
Applied to Tax Base to determine tax liability:
-proportional
-progressive or
-regressive
Incidence of Tax
Degree to which total tax burden is shared by taxpayers
Proportional Tax Rate
Same rate for everybody
Progressive Tax Rate
The higher your income, the higher your tax rate, up to a 37% rate.
Regressive Tax Rate
Flat tax rate, and then the more income you make, the tax rate comes down
Example: social security tax rate
Types of taxes
-transaction (usually state tax)
-estate & gift tax
-generation skipping transfer
-income
-employment
-property (ad valorem)
-other (sales, road, lodging)
Estate Planning Taxes
-estate & gift tax
-generation skipping transfer
Income Tax Planning
-income
-employment
What types of taxes make up 80% of the revenue that the government receives
Income & employment taxes
Whats the first day of the year that you get to keep the money based on your annual payment of taxes
Between April 15th & May 1st (Tax Freedom Day)
What are the 3 separate US Federal Tax Systems
-Income Tax
-Estate & Gift Tax
-Generation-Skipping Transfer Tax
Internal Revenue Collections
Individual Income Tax accounts for 55.8%
Employment Tax accounted fro 30.6%
Roughly a total of ~80% of revenue collected
Basic Rules of Income Taxation
- All accretions of wealth, from whatever source derived, constitute income
- For every deduction taken, there must be an inclusion on income
What are the “Exceptions” to Rule #1 in regards to the Basic Rules of Income Taxation
Rule #1: all accretions to wealth, from whatever source derived, constitute income.
Exceptions:
-realization principle
-capital recovery doctrine
-Public policy exclusions
What are the “Exceptions” to Rule #2 in regards to the Basic Rules of Income Taxation
Rule #2: For every deduction taken, there must be an inclusion on income
Exceptions:
-qualified retirement plans
-charitable planning
What are the “Implications” to Rule #2 in regards to the Basic Rules of Income Taxation
Implications:
-to claim a deduction on a tax return, that amount must hav been included in income
-every deduction claimed by one taxpayer should constitute income to another taxpayer
Triads of income taxation
Come in 3’s:
-tax systems
-types of income
-types of tax accounting
-key tax principals
-components for classifying gain
-types of assets
-types of rental real estate
-methods of tax planning
-anti-abuse provisions
-administrative rulings
-final regulations
-courts to resolve disputes
Think big picture for taxes in terms of general rules & the exceptions
There are general tax rules and exceptions to the general rule and sometimes there are exceptions to the exceptions
3 types of income
- Active (ordinary)
- Portfolio
- Passive
3 types of tax accounting
- Cash method
- Accrual method
- Hybrid method
3 key tax principles
- Doctrine of constructive receipt
- Economic benefit doctrine
- Doctrine of the fruit and the tree
3 components for classifying gains
- The type of asset that was held
- The use to which the asset was put
- The holding period (how long the asset was held)
3 types of assets
- Capital assets
- Ordinary income assets
- IRC Section 1231 assets
3 uses of assets
- Can use it for personal purposes (Personal use assets)
- Can use it in the active conduct of a trade or business (business assets)
- Can use it for the production of income (production of income assets)
3 types of rental Real Estate
- Tax-free rentals activities
- Ordinary rental use activities
- Mixed use activities
3 methods of tax planning
- The advisor and client can legally avoid taxation. In addition, the advisor may be able to help clients:
-shift incoem to related taxpayers in lower income tax brackets, or
-realize income in a form that is taxed at lower tax rates (ling-term capital gains or qualified dividends) - The advisor and client can deduct expense to reduce taxable income and take tax credits to reuse taxes due
- The advisor and client can deer in elm and thus defer taxation
3 anti-abuse provisions
- The alternative minimum tax (AMT)
- The at-risk rule limitations
- The passive activity rules
3 types of administrative rulings
- Revenue rulings
- Private letter rulings
- Determination letters
3 types of final regulations
- Procedural regulations
- Interpretative
- Legislative regulations