chapter 16 tax planning: concepts and strategies chapter 16: tax planning1

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CHAPTER 16 Tax Planning: Concepts and Strategies Chapter 16: Tax Planning 1

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Page 1: CHAPTER 16 Tax Planning: Concepts and Strategies Chapter 16: Tax Planning1

CHAPTER 16

Tax Planning:Concepts and

Strategies

Chapter 16: Tax Planning 1

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EIGHT PLANNING AREAS AGAIN

• S: Safety through Risk Management Planning

• E: Educational Planning

• C: Cash Mgt., Savings, Credit, and Debt Planning

• U: Ultimate Disposition through Estate Planning

• R: Retirement Planning

• I: Investment Planning

• T: Tax Planning

• Y: Yearning for Financial Independence Planning

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INTRODUCTION

Tax planning is concerned with timing and method by which income is reported and deductions and credits are claimed

Every taxpayer’s obligation is to minimize overall tax burden

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Five Ds ofTax Planning Techniques

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DEDUCTION Forgotten Deductions

Medical expensesMiscellaneous deductionsCharitable contributionsState and local income taxes

Flexible Spending Arrangement Moving Expenses Tax-Deductible Interest Prepayment Strategy

Pay deductible expenses for next year this year Marriage Penalty

Not as severe as previous times

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DEDUCTIONS (Contd.)

Other DeductionsBusiness Expenses

May be taken care of on schedule CThis refers to expenses not included there.

Real Estate Losses

Rental ExpensesCan you convert a property into rental property to

take the expensesStay less than 14 days or 10% of the days rented out

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DIVERSION Home Ownership Municipal Bonds Matching Incomes and Losses Tax Shelters

Limited Partnerships Master Limited Partnerships (MLPs) Publicly Traded Partnerships (PTPs)

Personal Exemption Transfer income generating assets to older

children Like-kind Exchanges Charitable Donations

Charitable remainder or unitrusts

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DEFERRALS

Deferral with Pre-tax DollarsTraditional IRA’s and company

retirement palns

Deferral with After-tax DollarsRoth IRA plansVariable annuities

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DEFLECTION

Kiddie Tax1st $850 is tax exempt; next 850 taxed at the

child’s rate (10%); if under 18 Next then reverts to parent’s tax rate

GiftsBasis is the original basis for the donor; but if

income generating then the taxes would no longer be “owed” by the parent.

Child EmploymentKids can earn up to %350 with tax, also might

not have to pay FICA if a small business

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DIMINUTION

Income DeferralMove income to later years

Income AccelerationItemized Deductions to Accelerate or

Defer IncomeState Income TaxCharitable ContributionsContribution of Appreciated PropertyMedical ExpensesAccelerating Interest Deductions

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DIMINUTION (Contd.)

Personal and Qualified Residence Interest Consumer Loans Mortgage Interest Points

Investment Interest

Employee Benefit Expenses Home Office Expense Use of Personal Automobile for Business Miscellaneous Deductions (2% Floor) Business Meals, Entertainment and Travel Club Dues

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DIMINUTION (Contd.)

Expense ShiftingAlternative Minimum TaxSocial Security BenefitsSplitting Business Income

Form family partnershipsMutual Fund Sales

Instruct dealer to sell the highest cost sharesS Corporation Strategy

Taxed like partnerships

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Chapter 16: Tax Planning 13

GOLDEN RULES OF ACHIEVING FINANCIAL INDEPENDENCE

– Six keys to success:

• Live within means• Build up an emergency fund• Start saving early• Pay yourself first• Reach for higher returns• Know the limits of your knowledge