Tax Planning
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TAX PLANNING
Tax planning in the tax practice Fundamental tenets Tax rate terminology Tax planning goals Avoiding tax traps Tax motivated loans
Delay income recognition Accelerate deductions
Marginal rate considerations
Shift income to low rate years Shift deductions to high rate years
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Tax Base
(2 of 2)
Wealth taxes
Levies against net holdings of tangible (or intangible) assets that are controlled by a taxpayer at a given time
Also reflects capacity to support government finance
Incentives for tax planning
Fed. income tax not deductible
Full amount of tax saved increases after-tax income (tax savings not taxable)
Tax planning is deductible
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Tax Base
(1 of 2)
Income tax
Based on ordinary taxable income less deductions for business & certain personal expenditures
Reflects capacity to support government finance
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Tax Planning in the Tax Practice (1 of 2)
Client goals must be broadly stated Practitioner can be more creative High degree of control in open fact
patterns
taxable income Effective averaபைடு நூலகம்e tax rate
Tax liability _ economic income
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Tax Planning Goals
Fundamentals of tax planning
Avoiding income recognition
Postponing income recognition
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Tax Planning in the Tax Practice
(2 of 2)
Types of tax & wealth planning
Tax Cash Risk Education Retirement Investment Estate
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Fundamental Tenets
Taxes are an additional cost of doing business or accumulating wealth
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Marginal Tax Rate
Used in decision-making analysis
Nominal marginal tax rate
Tax rate on next dollar of income per the tax rate schedules
Effective marginal tax rate
Actual tax rate on next dollar of
income after accounting for phase-out
provisions & limitations
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Average Tax Rate
Nominal average tax rate Tax liability _
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Tax Rates
Tax rate structures
Proportional Progressive Regressive
Types of tax rates
Marginal Average
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Proportional Tax Rate
Tax rate is constant for the entire tax base
Changing tax jurisdictions
Controlling classification of income
Spreading income among related
taxpayers
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Fundamentals of Tax Planning
Present value considerations
ATC = BTC x (1-MTR)
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Tax Rate Terminology
Tax liabilities should meet revenue & nonrevenue objectives of the tax system.
Tax Liability = Tax Base x Tax Rate
e.g., sales & property taxes
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Progressive Tax Rate
Tax rate increases as tax base increases
Additional income taxed at increasingly higher rates
e.g., income, estate & gift taxes
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Regressive Tax Rate
Tax rate decreases as tax base increases
Additional income taxed at increasingly lower rates
Social security tax
Social security tax (0% over $80,400 in 2001).