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After completing this chapter, students will be able to: Identify the objectives of basic tax planning strategies; apply the timing strategy and describe its applications and limitations; apply the concept of present value to tax planning; apply the strategy of income shifting, provide examples, and describe its limitations;. | Chapter 3 Tax Planning Strategies and Related Limitations Learning Objectives Identify the objectives of basic tax planning strategies. Apply the timing strategy and describe its applications and limitations. Apply the concept of present value to tax planning. Apply the strategy of income shifting, provide examples, and describe its limitations. Learning Objectives (Cont.) Apply the conversion strategy, provide examples, and describe its limitations. Describe basic judicial doctrines that limit tax planning strategies. Contrast tax avoidance and tax evasion Basic Tax Planning Overview Effective planning requires consideration for both tax and non-tax factors In general terms, effective tax planning maximizes the taxpayer’s after-tax wealth while achieving the taxpayer’s non-tax goals 3 parties to every transaction: taxpayer, other party, and the government 3 basic planning strategies: timing, income shifting, and conversion Timing Strategies When income is taxed or an expense is . | Chapter 3 Tax Planning Strategies and Related Limitations Learning Objectives Identify the objectives of basic tax planning strategies. Apply the timing strategy and describe its applications and limitations. Apply the concept of present value to tax planning. Apply the strategy of income shifting, provide examples, and describe its limitations. Learning Objectives (Cont.) Apply the conversion strategy, provide examples, and describe its limitations. Describe basic judicial doctrines that limit tax planning strategies. Contrast tax avoidance and tax evasion Basic Tax Planning Overview Effective planning requires consideration for both tax and non-tax factors In general terms, effective tax planning maximizes the taxpayer’s after-tax wealth while achieving the taxpayer’s non-tax goals 3 parties to every transaction: taxpayer, other party, and the government 3 basic planning strategies: timing, income shifting, and conversion Timing Strategies When income is taxed or an expense is deducted affects the associated “real” tax costs or savings for 2 reasons (1) the time that income is taxed or an expense is deducted affects the present value of the taxes paid on income or the tax savings on deductions. (2) the tax costs of income and tax savings income vary as tax rates change Timing Strategies The concept of Present Value. $1 today is worth more than $1 in the future. The implication of the time value of money for tax planning is that the timing of a cash inflow or a cash outflow affects the present value of the income or expense When considering cash inflows, higher present values are preferred; when considering cash outflows, lower present values are preferred Timing Strategies Present Value = Future Value / (1 + r)n Exhibit 3-1 provides the discount rates for a lump sum (single payment) received in n periods using various rates of return Timing Strategies Two basic tax-related timing strategies: Accelerating deductions Essentially accelerating a current cash inflow .
