Problem Set #2

Problem Set #2 - Daniel Paterson ACIS 3314 10139 Problem...

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Daniel Paterson ACIS 3314 - 10139 2/10/2011 Problem Set #2 1. The goal of tax planning is not to minimize taxes but to maximize the taxpayer’s after-tax wealth while achieving the taxpayer’s nontax goals. Maximizing after tax wealth and minimizing taxes are not the same because maximizing after tax wealth requires us to consider both the tax and nontax costs and benefits of alternative transactions, where as tax minimization focuses solely on the single cost of taxes. 10. A dollar today is more valuable than a dollar in the future because according to the principal of time value of money an investor can earn a positive after-tax rate of return on that dollar. 12. The two factors that increase the difference between present and future value are the discount factor which is derived from the expected after-tax return used to calculate the present value of the future cash inflow or outflow and the period. 13. In order for income shifting to be a viable tax strategic you must follow the assignment of income doctrine which requires income to be taxed at the marginal rate of the taxpayer who actually earned the income. For investment income, the “fruit and tree” analogy is used which states for the owner to avoid being taxed on the investment income he would have to transfer the whole investment to his child. Also, the IRS highly scrutinizes related-party transactions when an attempt is made to transfer wealth to a child with a lower marginal tax rate. Also, a sole proprietorship can become incorporated in order to deduct compensation expense or the business owner can rent property to the corporation in order to shift income. Finally, shifting taxes to different jurisdictions with lower tax rates is a highly scrutinized way of income shifting. 16. The key factor in shifting income from business to an owner is for the business owner to create a separate taxable corporation for their business. By using this strategy, the business profits are taxed at the corporate rate instead of the owner’s individual rate. In order to shift income from the corporation to the owner, the corporation must create a tax deduction for itself. Compensation paid to employee-owners is the most common method of shifting income from
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This note was uploaded on 08/22/2011 for the course ACIS 3314 taught by Professor Hicks during the Spring '09 term at Virginia Tech.

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Problem Set #2 - Daniel Paterson ACIS 3314 10139 Problem...

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