Fun.4.PPT.12 - Michael A Dalton | James F Dalton | Joseph M...

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Michael A. Dalton | James F. Dalton | Joseph M. Gillice | Thomas P. Langdon
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Fundamentals of Financial Planning © 2014 Money Education Chapter CHAPTER 12: INCOME TAX PLANNING
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Fundamentals of Financial Planning © 2014 Money Education Chapter THREE TYPES OF INCOME The three types of income are: 1. Active (ordinary) income 2. Portfolio income 3. Passive income Categorization of income is important for two reasons: •. Different tax consequences apply to each type of income •. The “bucket rule” limits a taxpayer’s ability to write off losses in one income bucket only to the gains in that same bucket. 3 12
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Fundamentals of Financial Planning © 2014 Money Education Chapter THREE TYPES OF TAX ACCOUNTING The three methods of accounting are: 1. Cash method 2. Accrual method 3. Hybrid method Under the cash method, income is taxed when it is received, and allowable deductions are claimed when they are paid. Under the accrual method of accounting, income is taxed when it is earned (whether or not it has been received), and deductions are claimed when they are incurred (whether or not they have been paid). Any method of accounting other than the cash method or accrual method that is approved by the IRS is referred to, collectively, as the hybrid method. 4 12
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Fundamentals of Financial Planning © 2014 Money Education Chapter THREE KEY TAX PRINCIPLES The three key tax principles are: Doctrine of constructive receipt Economic benefit doctrine Doctrine of the fruit and the tree The doctrine of constructive receipt states that even if you have not actually received the income, if you have constructively received it, it is income. The economic benefit doctrine states that if a taxpayer receives an economic benefit as income, the value of that benefit will be subject to tax. The doctrine of the fruit and the tree is that income is taxed to either: The person who earns it The person who owns the asset that produced the income 5 12
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Fundamentals of Financial Planning © 2014 Money Education Chapter 16 TH AMENDMENT 16th Amendment - “The Congress shall have power to lay and collect taxes on income, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” 16th Amendment became the foundation for income tax law in the United States. 6 12
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Fundamentals of Financial Planning © 2014 Money Education Chapter INTERST & PENALTIES FOR NONCOMPLIANCE Failure to file penalty under Section 6651 – Imposed on taxpayers who fail to pay the tax due on the due date. An accuracy-related penalty is imposed on taxpayers who file incorrect returns as a result of: Failure to make a good faith effort to comply with the tax law Substantial understatement of tax liability Substantial valuation understatement Substantial estate or gift tax valuation understatement 7 12
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Fundamentals of Financial Planning © 2014 Money Education Chapter SUMMARY OF PENALTIES Failure to File 5% per month or part thereof to 25% maximum
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