Tax Planning

Question 1

What are the three most basic types of tax planning?

Answer 1

Timing of income recognition, shifting of income among taxpayers and jurisdictions, conversion of income among high- and low-rate activities

These types of tax planning help in strategically managing tax liabilities.

Question 2

Define ‘Timing of income recognition’ in tax planning.

Answer 2

The strategy of choosing when to recognize income for tax purposes to minimize tax liability.

This can involve deferring income to a later year or accelerating it into the current year.

Question 3

What does ‘Shifting of income’ refer to in tax planning?

Answer 3

The practice of reallocating income among different taxpayers or jurisdictions to take advantage of lower tax rates.

This can include gifting income to family members in lower tax brackets or transferring income to jurisdictions with lower taxes.

Question 4

What is meant by ‘Conversion of income’ in tax planning?

Answer 4

The strategy of changing the form of income to take advantage of different tax rates applicable to high- and low-rate activities.

For example, converting ordinary income into capital gains, which may be taxed at a lower rate.

Question 5

What are the tax jurisdictions involved in shifting income within the U.S.?

Answer 5

The jurisdictions can be city, county, or state jurisdictions.

Question 6

Can income be shifted from U.S. jurisdictions to other nations?

Answer 6

Yes, income can be moved from U.S. jurisdiction to that of another nation.

Question 7

What happens when multiple nations claim the right to tax an individual or business?

Answer 7

Credit will usually be given by each country for tax paid to the other.

Question 8

What is the purpose of giving tax credit between nations?

Answer 8

It helps to avoid double taxation and encourages international business.

Question 9

What is a favorable conversion in income categorization?

Answer 9

Converting ordinary income property into capital gain property.

This process allows for potentially lower tax rates on the converted income.

Question 10

What is the opposite of favorable conversions in income categorization?

Answer 10

Converting capital gain property into ordinary income property.

This can lead to higher tax implications on the converted income.

Question 11

Fill in the blank: Converting _______ property into capital gain property is considered favorable.

Answer 11

ordinary income

Question 12

Fill in the blank: The opposite of converting ordinary income property is converting _______ property into ordinary income property.

Answer 12

capital gain

Question 14

What is a below-market-rate loan?

Answer 14

A loan with an interest rate below the Applicable Federal Rate (AFR)

The AFR is a minimum level set by the federal government and is adjusted monthly.

Question 15

How is imputed interest income calculated?

Answer 15

Imputed interest income = Interest using AFR – Interest the taxpayer actually pays

Question 16

Is imputed interest considered taxable income?

Answer 16

Yes, imputed interest is ordinary taxable income.

Question 17

Do rules on imputed interest apply to all loans?

Answer 17

No, they do not apply to loans of $10,000 or less between the lender and borrower.

Question 18

What are examples of loans that may have imputed interest?

Answer 18

Examples include:
* Gift loans between friends and family members
* Compensation-related loans between employers and employees
* Loans from corporations to shareholders

Question 19

What is foreign-earned income?

Answer 19

Any wages, salaries, professional fees, or other amounts paid to the taxpayer for services rendered by the taxpayer in a foreign country.

Question 20

Which payments are not considered foreign-earned income?

Answer 20

• Pay as a military or civilian employee of the U.S. government or its agencies
• Pay for services conducted in international waters or airspace
• Pay received after the end of the tax year in which the services were performed
• Pension and annuity payments, such as Social Security benefits

Question 21

What is the maximum amount of foreign-earned income that U.S. citizens can exclude from gross income in calendar year 2024?

Answer 21

$126,500

Question 22

What are the residency requirements to qualify for the foreign-earned income exclusion?

Answer 22

The taxpayer must be a resident of at least one foreign country for the entire taxable year or be present in at least one foreign country for 330 days during a consecutive 12-month period.

Question 23

What happens to the exclusion if the taxpayer does not meet the residency or presence requirements?

Answer 23

The exclusion must be prorated.

Question 24

Are any deductions attributed to foreign-earned income allowed?

Answer 24

Any deductions attributed to the foreign-earned income are disallowed.

Question 25

What must a taxpayer choose between regarding foreign-earned income?

Answer 25

A taxpayer must choose between excluding the income or including it and claiming the Foreign Tax Credit.

Question 26

Fill in the blank: Foreign-earned income is defined as any wages, salaries, professional fees, or other amounts paid to the taxpayer for _______ rendered by the taxpayer in a foreign country.

Answer 26

[services]