Tax Panning Strategies for Individuals Flashcards
What tax rate is used for decision making?
Marginal tax rate.
What is marginal tax rate?
The amount of taxes that will be paid on the next dollar of taxable income or that will be saved on the next dollar of deduction.
What is the tax saving and impact on cash flows; $1,000 charitable contribution; MTR=25%?
Tax savings: 1,000x25%=$250.
Cash flow impact; 1,000-250(money saved)=750 outflow
What are 2 causes that change tax rates over time?
Moving between tax brackets.
Statutory changes in rates.
What’s the tax strategy if rates are increasing in the future? If tax rates are decreasing?
Accelerate income and defer deductions.
Accelerate deductions and defer income.
What shifting can TP use to save taxes?
Shift income to lower-bracket TPs. (i.e. to children who are in lower brackets).
What can TP use to save taxes re: character of income - example?
i.e. LTCG has lower tax rate than ordinary income (also net STCG is taxed as ordinary income).
Try to owe an asset more than year so that TP can shift it to LTCG.
What can TP use to save taxes re: jurisdiction - example?
i.e. US tax rates vs foreign tax rates.
What’s the formula to compute tax-exempt rate?
Example: what is the equivalent of a tax-free bond to a 10% taxable bond when MTR is 15%? How can TP know to use the result in selecting the choice of bond?
Taxable rate x (1 - marginal rate) = Tax-exempt rate.
10% x (1 - 0.15) = 8.5%
This means the tax benefits of a 10% taxable bond and 8.5% tax-free bond is the same. If there is tax-free bond (i.e. municipal bond) over 8.5% available, it’s better for TP.
Tax strategies timing: Installment method? NOLs? Casualty losses? Itemized deduction/medical? AMT?
- I: cash collected - recognition.
- NOLs; 2 yrs carry back, 20 yrs forward. For carry back, TP files amendment return and get refund.
- Casualty losses: sometimes allowed to recognize loss a year before the loss year.
- Itemized/medical: if it exceeds 10%, beneficial to accelerate medical expenses.
- AMT: deduction is not allowed. Defer deductions.
Tax strategies timing: Capital gains/losses? Estimated tax? Carryforward benefits?
- Capital G/L: Net loss deduction is limited to $3,000. But if TP can generate more gain to offset unused losses, it reduces taxable income.
- make adjustment to estimated tax withholding to avoid underp-amt penalty.
- Carryforward: make sure to use them up before they expire. (i.e. reduces the current contribution to absorb the past carryforward).
Tax strategies shifting; Investment income? Business income? Section 529 plans?
- Shifts investment assets to children with lower tax rates.
- Hire children in owned business - as long as wages are reasonable, the pmt can be deducted from business income of parents and will be taxed at lower tax rate of children.
- Gift tax: Take advantages of first $14,000 exclusion of gift amount to avoid tax.
- Sec 529; for educational expenses - earnings is tax free.
Tax strategies conversion; Qualified dividends? Ordinary income vs LTCG? Passive losses? Nontaxable fringe benefits vs salary?
- QD: must owe 60days before and after.
- Passive losses: how can TP get more involved in business that they will become not passive loss anymore to offset active income.
- Fringe benefits; increase to reduce taxable salary.
Tax strategies; defer income - like kind exchange? Retirement plans?
- like-kind exchange rules (find someone who owns like kind property rather than selling).
- Retirement plans; maximize contributions.
Tax strategies; which one is better - regular tax or AMT?
Regular tax.
