Chapter 15

Tax Planning for Individuals

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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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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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General Principles of Tax Planning

Chapter 15

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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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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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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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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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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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Self-Employed versus Employee

Chapter 15

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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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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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Family Tax Planning

Income Shifting College Planning Divorce Settlements

Chapter 15, Exhibit 8

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Income Shifting

Government Bonds Series EE Bonds Bonds to finance higher education

Chapter 15, Exhibit 9a

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Income Shifting

Municipal Bond Stock and Land Life Insurance Employment in Family Business Intrafamily Loans

Chapter 15, Exhibit 9b

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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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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