Transcript 4c

Chapter
4
Basic Maxims of Income
Tax Planning
INCOME TAX PLANNING – SHIFTING INCOME

Income Shifting


Deduction Shifting



Arrange transactions to transfer income from a high
tax rate entity to a low tax rate entity or from a high
rate tax year to a low tax rate year.
Arrange transactions to transfer deductions from a low
tax rate entity to a high tax rate entity or from a low
rate tax year to a high rate tax year.
Assignment of Income Doctrine prohibits shifting
of income from property UNLESS the property is
transferred also.
Income shifting during periods of changing rates
may compete with general tax deferral maxim.
INCOME TAX PLANNING - TIME
Because income is reported only once a
year, the tax paid or tax savings from
any transaction depends on the year
the transaction occurs.
 In present value terms, tax costs
decrease (and cash flows increase)
when a tax liability is deferred until a
later taxable year. Limited by:

 Opportunity
Costs
 Tax Rate Changes
INCOME TAX PLANNING - TIME

Opportunity Costs
Shifting tax liabilities to a later period also
may entail shifting income to a later period.
Thus, the opportunity costs of shifting the
income may be greater than the tax savings
associated with the liability deferral.
 Tax Rate Changes
 If taxpayers defer a tax liability to a future
date and Congress increases tax rates the
benefits of the deferral may be lost or
substantially limited.
