2013 cch basic principles ch15
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Chapter 15
Tax Planning for Individuals
©2012 CCH. All Rights Reserved.4025 W. Peterson Ave.Chicago, IL 60646-60851 800 248 3248www.CCHGroup.com
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CCH Federal Taxation Basic Principles 2 of 35
Chapter 15 Exhibits
General Principles of Tax Planning 1. Avoiding Income Recognition 2. Deferral of Income 3. Acceleration of Income into Early Year 4. Acceleration of Deductions 5. Deferral of DeductionsSelf-Employed versus Employee 6. Health Insurance 7. Trade or Business Expenses 8. Family Tax Planning 9. Income Shifting10. College Planning
Chapter 15, Exhibit Contents A
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CCH Federal Taxation Basic Principles 3 of 35
11. Divorce Settlements12. Divorce13. Fixed Asset Planning14. Fixed Assets15. Itemized Deductions—Three Tier System16. Tier 117. Tier 218. Retirement and Other Planning
Chapter 15 Exhibits
Chapter 15, Exhibit Contents B
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CCH Federal Taxation Basic Principles 4 of 35
General Principles of Tax Planning
Chapter 15
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CCH Federal Taxation Basic Principles 5 of 35
Avoiding Income Recognition
Investment in municipal bonds Nontaxable fringe benefits Group term life insurance Employer discounts Educational assistance
Chapter 15, Exhibit 1
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CCH Federal Taxation Basic Principles 6 of 35
Deferral of Income
Defer income on Series EE bonds Like-kind exchanges Elect deferral through involuntary conversion
Chapter 15, Exhibit 2
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CCH Federal Taxation Basic Principles 7 of 35
Acceleration of Income into Early Year
If in later years you would have higher income If in later years you expect higher tax rates Sell investments with gains early Investors in Series EE bonds could recognize interest
as it accrues
Chapter 15, Exhibit 3
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CCH Federal Taxation Basic Principles 8 of 35
Acceleration of Deductions
Pay two years charitable contributions in one year Take losses on investments this year Prepay state or local income taxes Incur certain controllable medical expenses this
year Take Section 179 expensing election
Chapter 15, Exhibit 4
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CCH Federal Taxation Basic Principles 9 of 35
Deferral of Deductions
If you expect that in later years you will have higher income
If you expect tax rates to rise Pay this year’s charitable contributions next year Sell investments with losses next year Defer state or local income taxes Incur controllable medical expenses next year
Chapter 15, Exhibit 5
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CCH Federal Taxation Basic Principles 10 of 35
Self-Employed versus Employee
Chapter 15
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CCH Federal Taxation Basic Principles 11 of 35
Health Insurance
Self-employed may take 100 percent of health insurance as a deduction for adjusted gross income
Employee takes health insurance as medical expense subject to 7.5% reduction
Chapter 15, Exhibit 6
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CCH Federal Taxation Basic Principles 12 of 35
Trade or Business Expenses
Self-employed takes expenses on Schedule C as a deduction for AGI
Employee takes business expenses as a miscellaneous itemized deduction subject to the 2% floor
Chapter 15, Exhibit 7
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CCH Federal Taxation Basic Principles 13 of 35
Family Tax Planning
Income Shifting College Planning Divorce Settlements
Chapter 15, Exhibit 8
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CCH Federal Taxation Basic Principles 14 of 35
Income Shifting
Government Bonds Series EE Bonds Bonds to finance higher education
Chapter 15, Exhibit 9a
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CCH Federal Taxation Basic Principles 15 of 35
Income Shifting
Municipal Bond Stock and Land Life Insurance Employment in Family Business Intrafamily Loans
Chapter 15, Exhibit 9b
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CCH Federal Taxation Basic Principles 16 of 35
College Planning
Custodial accounts and nongrantor trusts Compensation for services Individual retirement accounts Qualified tuition programs American opportunity credit Lifetime learning credit
Chapter 15, Exhibit 10
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CCH Federal Taxation Basic Principles 17 of 35
Divorce Settlements
Front-loading provisions Second year payment can be up to $15,000 greater
than the third year payment First year payment can be up to $7,500 greater than
the second year payment
Chapter 15, Exhibit 11
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CCH Federal Taxation Basic Principles 18 of 35
Divorce
Exemptions Consider which parent is in the higher bracket or
which one will receive the greater benefit Consider child support payment adjustment for
maximum benefit Consider the phaseout of exemptions
Chapter 15, Exhibit 12a
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CCH Federal Taxation Basic Principles 19 of 35
Divorce
Alimony Payments Alimony is considered earned income for IRA
purposes Tax advice on tax matters may be deductible
Chapter 15, Exhibit 12b
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CCH Federal Taxation Basic Principles 20 of 35
Fixed Asset Planning
Section 179 expensing election $139,000 for 2012 For investments in tangible personal property $139,000 is reduced dollar for dollar for
investments over $560,000 Consider tax bracket
Chapter 15, Exhibit 13
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CCH Federal Taxation Basic Principles 21 of 35
Fixed Assets
Leasing vs. Buying Like-kind exchanges can be very advantageous Substantial exclusions are available for sale of
residences Remodeling and home improvements can increase
basis
Chapter 15, Exhibit 14a
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CCH Federal Taxation Basic Principles 22 of 35
Fixed Assets
Rental losses are deductible up to $25,000 Assumes active participation Phaseout between $100,000 and $150,000 of AGI
Chapter 15, Exhibit 14b
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CCH Federal Taxation Basic Principles 23 of 35
Fixed Assets
Involuntary conversions – the election of nonrecognition of gain can be very beneficial
Section 1231 assets – if possible, take Sec. 1231 gains before Sec. 1231 losses to avoid the ordinary income recapture if Sec. 1231 losses were taken in years before the Sec. 1231 gains were taken
Chapter 15, Exhibit 14c
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CCH Federal Taxation Basic Principles 24 of 35
Itemized Deductions—Two Tier System
Tier 1 Separately listed on Schedule A Allowable as other Misc. Deductions not subject to
percentage reduction
Chapter 15, Exhibit 15a
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CCH Federal Taxation Basic Principles 25 of 35
Tier 2 Itemized deductions subject to a fixed percentage
limit or reduced by percentages of AGI Itemized deductions subject to 2% of AGI
limitation
Chapter 15, Exhibit 15b
Itemized Deductions—Two Tier System
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CCH Federal Taxation Basic Principles 26 of 35
Tier 1
Itemized deductions separately listed on Schedule A State and local income taxes Property taxes Mortgage interest (limited to two residences) Investment interest (limited to investment income)
Chapter 15, Exhibit 16a
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CCH Federal Taxation Basic Principles 27 of 35
Tier 1
Itemized deductions allowable as other misc. ID Gambling losses to extent of gambling winnings Federal estate tax on income in respect of decedent Unrecovered investment in an annuity
Chapter 15, Exhibit 16b
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CCH Federal Taxation Basic Principles 28 of 35
Tier 2
Itemized deductions subject to a fixed percentage Medical expenses (reduced by 7.5% of AGI) Charitable contributions (subject to 50, 30,
and 20 percent of AGI limits) Casualty and theft losses (reduced by 10% of
AGI)
Chapter 15, Exhibit 17a
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CCH Federal Taxation Basic Principles 29 of 35
Tier 2 Itemized deductions subject to 2% of AGI limitation
Employee expenses (with examples) Dues to professional societies Employment-related education expenses Job-hunting expenses Employee home office expenses Subscriptions to professional publications Work clothes and uniforms Union dues and fees Travel and transportation expenses Technical books and tools
Chapter 15, Exhibit 17b
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CCH Federal Taxation Basic Principles 30 of 35
Tier 2
Itemized deductions subject to 2% of AGI limitation (continued) Production of income expenses (with examples)
Legal and accounting fees Custodial fees related to income-producing property IRA custodial fees Hobby expense up to hobby income Investment counsel fees Safe deposit box rentals (for non-tax-exempt
securities) Tax services and preparation fees Publications related to investment activities
Chapter 15, Exhibit 17c
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CCH Federal Taxation Basic Principles 31 of 35
Retirement and Other Planning
Individual retirement accounts (IRAs) $5,000 deduction ($6,000 if age 50 or older) Phaseout between $58,000 and $68,000 for singles
and $92,000 and $112,000 for joint filers if active participants in qualified plans
Nondeductible contributions are permitted Homemakers may qualify for full deduction
Chapter 15, Exhibit 18a
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CCH Federal Taxation Basic Principles 32 of 35
Retirement and Other Planning
Coverdell Education Savings Account Allows a taxpayer to contribute up to $2,000
per beneficiary per year Annual contribution limit is phased out
between $190,000 and $220,000 for joint filers and $95,000 and $110,000 for single filers
Distributions from education savings accounts are excluded from gross income to extent they do not exceed beneficiary’s qualified higher education expenses
Chapter 15, Exhibit 18b
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CCH Federal Taxation Basic Principles 33 of 35
Retirement and Other Planning
Roth IRA Nondeductible contributions can be made Maximum yearly contribution is $5,000
($6,000 for taxpayers 50 or older) Phaseout between $110,000 and $125,000 for
single filers and between $173,000 and $183,000 for joint filers
Qualified distributions from a Roth IRA are not taxable and are not subject to the 10% withdrawal penalty
Chapter 15, Exhibit 18c
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CCH Federal Taxation Basic Principles 34 of 35
Retirement and Other Planning
Section 401(k) Plans Opportunities for tax deferral May prevent a deductible IRA contribution
Chapter 15, Exhibit 18d
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CCH Federal Taxation Basic Principles 35 of 35
Retirement and Other Planning
Retirement plan distributions 10% premature withdrawal penalty for
distributions prior to age 59½ Exceptions for paying qualified higher education
expenses, withdrawals made for reason of hardship, medical expenses, etc.
Qualified plan distributions must begin no later than April 1 of the year following the year in which the participant turns age 70½
Chapter 15, Exhibit 18e