1. Chapter 15
Tax Planning for
Individuals
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2. 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 Deductions
Self-Employed versus Employee
6. Health Insurance
7. Trade or Business Expenses
8. Family Tax Planning
9. Income Shifting
10. College Planning
Chapter 15, Exhibit Contents A CCH Federal Taxation Basic Principles 2 of 35

3. Chapter 15 Exhibits
11. Divorce Settlements
12. Divorce
13. Fixed Asset Planning
14. Fixed Assets
15. Itemized Deductions—Three Tier System
16. Tier 1
17. Tier 2
18. Retirement and Other Planning
Chapter 15, Exhibit Contents B CCH Federal Taxation Basic Principles 3 of 35

4. General Principles of Tax
Planning
Chapter 15 CCH Federal Taxation Basic Principles 4 of 35

5. Avoiding Income Recognition
 Investment in municipal bonds
 Nontaxable fringe benefits
 Group term life insurance
 Employer discounts
 Educational assistance
Chapter 15, Exhibit 1 CCH Federal Taxation Basic Principles 5 of 35

6. Deferral of Income
 Defer income on Series EE bonds
 Like-kind exchanges
 Elect deferral through involuntary conversion
Chapter 15, Exhibit 2 CCH Federal Taxation Basic Principles 6 of 35

7. 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 CCH Federal Taxation Basic Principles 7 of 35

8. 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 CCH Federal Taxation Basic Principles 8 of 35

9. 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 CCH Federal Taxation Basic Principles 9 of 35

10. Self-Employed versus Employee
Chapter 15 CCH Federal Taxation Basic Principles 10 of 35

11. 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 CCH Federal Taxation Basic Principles 11 of 35

12. 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 CCH Federal Taxation Basic Principles 12 of 35

13. Family Tax Planning
 Income Shifting
 College Planning
 Divorce Settlements
Chapter 15, Exhibit 8 CCH Federal Taxation Basic Principles 13 of 35

14. Income Shifting
 Government Bonds
 Series EE Bonds
 Bonds to finance higher education
Chapter 15, Exhibit 9a CCH Federal Taxation Basic Principles 14 of 35

15. Income Shifting
 Municipal Bond
 Stock and Land
 Life Insurance
 Employment in Family Business
 Intrafamily Loans
Chapter 15, Exhibit 9b CCH Federal Taxation Basic Principles 15 of 35

16. 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 CCH Federal Taxation Basic Principles 16 of 35

17. 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 CCH Federal Taxation Basic Principles 17 of 35

18. 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 CCH Federal Taxation Basic Principles 18 of 35

19. Divorce
 Alimony Payments
 Alimony is considered earned income for IRA
purposes
 Tax advice on tax matters may be deductible
Chapter 15, Exhibit 12b CCH Federal Taxation Basic Principles 19 of 35

20. 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 CCH Federal Taxation Basic Principles 20 of 35

21. 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 CCH Federal Taxation Basic Principles 21 of 35

22. 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 CCH Federal Taxation Basic Principles 22 of 35

23. 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 CCH Federal Taxation Basic Principles 23 of 35

24. 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 CCH Federal Taxation Basic Principles 24 of 35

25. Itemized Deductions—Two Tier System
 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 CCH Federal Taxation Basic Principles 25 of 35

26. 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 CCH Federal Taxation Basic Principles 26 of 35

27. 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 CCH Federal Taxation Basic Principles 27 of 35

28. 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 CCH Federal Taxation Basic Principles 28 of 35

29. 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 CCH Federal Taxation Basic Principles 29 of 35

30. 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 CCH Federal Taxation Basic Principles 30 of 35

31. 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 CCH Federal Taxation Basic Principles 31 of 35

32. 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 CCH Federal Taxation Basic Principles 32 of 35

33. 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 CCH Federal Taxation Basic Principles 33 of 35

34. Retirement and Other Planning
 Section 401(k) Plans
 Opportunities for tax deferral
 May prevent a deductible IRA contribution
Chapter 15, Exhibit 18d CCH Federal Taxation Basic Principles 34 of 35

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 CCH Federal Taxation Basic Principles 35 of 35