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Published in:
The Story of David and Goliath, and Abby and Samson: A Journey with No Direction Read chapter Read first chapter

2021 | OriginalPaper | Chapter

8. Tax Planning and the Ten Commandments

Authors : Michael J. Nathanson, Jeffrey T. Craig, Jennifer A. Geoghegan, Nadine Gordon Lee, Michael A. Haber, Max B. Haspel, Seth P. Hieken, Matthew C. Ilteris, D. Scott McDonald, Joseph A. Salvati, Stephen R. Stelljes

Published in: Personal Financial Planning for Executives and Entrepreneurs

Publisher: Springer International Publishing

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Abstract

Through careful, advance planning, taxes can be minimized, and the burden of taxation can be satisfied. When done right, tax planning is a broad-based, continuous, and dynamic process. David, Abby, and other executives and entrepreneurs should follow the “Ten Commandments of Tax Planning” to optimize their after-tax results: optimize the deferral of income; maximize and accelerate deductions and credits; plan for tax withholding and estimated taxes; coordinate debt and taxes; understand and plan for the difference between ordinary income and capital gains; maximize the after-tax value of home ownership; consider taxes when making investment decisions; take advantage of tax-advantaged ways to pay for education; beware of all types of income-based taxes, including employment taxes; and maintain good tax hygiene.

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previous chapter Investment Planning in Five Steps
next chapter Estate Planning and Why It’s Really So Important
Footnotes
1
Commissioner v. Newman, 159 F.2d 848 (2d Cir. 1947). Learned Hand also said: “Any one may arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” See Helvering v. Gregory, 69 F.2d 809, 810–811 (2d Cir. 1934).
 
2
See Chap. 4.
 
3
The RMD Age as of publication is 72.
 
4
See I.R.C. §§ 401 and 408.
 
5
As we discuss tax planning around concepts such as IRAs, we must constantly refer to the legal limits for participating in these opportunities. As these limits are subject to constant change, we have decided to focus instead on the general concepts rather than on the specific limits in effect at the time of publication. For 2021, the annual traditional IRA contribution limit is the smaller of (1) $6,000 ($7,000 for individuals over 50) or (2) the individual’s taxable compensation for the year, subject to certain limited reductions. See I.R.S. Publication 590-A.
 
6
See I.R.C. § 408.
 
7
For 2021, the annual Roth IRA contribution limit is the smaller of (1) $6,000 ($7,000 for individuals over 50) or (2) the individual’s taxable compensation for the year, subject to reduction for higher-earning individuals. See I.R.S. Publication 590-A.
 
8
See I.R.C. § 408A.
 
9
See Chap. 9.
 
10
See I.R.S. Publication 590-A.
 
11
See I.R.C. § 401.
 
12
See I.R.C. § 402A.
 
13
See I.R.C. § 457.
 
14
See I.R.C. § 409A and Treas. Reg. § 1.409A-2.
 
15
See I.R.C. § 408.
 
16
See I.R.S. Publications 560 and 3998.
 
17
See I.R.C. § 408.
 
18
See I.R.S. Publications 560 and 3998. Publication 3998 offers a helpful comparison of the key structures for deferral-based retirement planning.
 
19
See I.R.S. Publication 972.
 
20
See I.R.S. Publication 503.
 
21
See I.R.S. Publication 970.
 
22
See I.R.S. Publication 590-A.
 
23
See I.R.S. Publication 514.
 
24
See I.R.C. §§ 25C and 25D.
 
25
See I.R.S. Publication 505.
 
26
See I.R.S. Publication 505.
 
27
See I.R.C. § 163.
 
28
See I.R.C. § 61.
 
29
See I.R.C. § 1222.
 
30
See I.R.C. § 1222.
 
31
See I.R.C. § 1211.
 
32
See I.R.C. § 1212.
 
33
See I.R.C. § 121.
 
34
See I.R.S. Publication 587.
 
35
See I.R.C. § 1091.
 
36
See I.R.C. § 1(h).
 
37
See I.R.C. § 1245.
 
38
See I.R.C. § 1202.
 
39
See I.R.C. §§ 1045 and 1202.
 
40
See I.R.C. § 1244.
 
41
See I.R.C. § 1244. As of 2020, the amount of loss that can be treated as an ordinary loss is limited to $50,000 (or $100,000 for married couples filing jointly).
 
42
Potential tax advantages under current law include:
  • a temporary deferral of taxable capital gain if the proceeds are reinvested in an Opportunity Zone fund within 180 days;
  • a potential reduction of the original capital gain based on the amount of time invested in the Opportunity Zone fund; and
  • the permanent exclusion of capital gain from the sale of an Opportunity Zone fund if held for at least 10 Years. This latter exclusion, however, applies only to the gain on the Opportunity Zone fund and not the original gain. See I.R.C. § 1400Z-2.
    Note that the Opportunity Zone program is currently scheduled to expire in 2026. Because of the pending expiration of this program, it may no longer be possible to take full advantage of some of its exclusions.
 
43
See I.R.C. § 103 and I.R.S. Publication 550. Interest can also be taxable when it is earned, even if it has not yet been received; and debt instruments that do not pay annual interest can be treated as paying annual interest for tax purposes. See I.R.S. Publication 550 and I.R.S. Publication 1212.
 
44
See I.R.S. Publication 550.
 
45
See I.R.C. § 529. I.R.S. Publication 970 offers a helpful guide to the various tax-favored mechanisms related to education.
 
46
See I.R.S. Publication 970.
 
47
See I.R.C. § 117.
 
48
See I.R.C. § 56.
 
49
Note that under the Tax Cuts and Jobs Act of 2017, the exemption amounts for avoiding the AMT were increased, limiting the applicability of the AMT.
 
50
See I.R.S. Publication 15.
 
51
See I.R.C. §§ 1401 and 1402.
 
52
See I.R.C. § 1401. The additional Medicare tax rate is currently 0.9%.
 
53
See I.R.C. § 1411. The current rate of net investment income tax is 3.8%.
 
54
See I.R.C. § 1(g) and I.R.S. Publication 929. These rules, along with all tax-related rules, are subject to further change in the future.
 
55
See I.R.C. §§ 280G, 409A, and 4999.
 
Metadata
Title
Tax Planning and the Ten Commandments
Authors
Michael J. Nathanson
Jeffrey T. Craig
Jennifer A. Geoghegan
Nadine Gordon Lee
Michael A. Haber
Max B. Haspel
Seth P. Hieken
Matthew C. Ilteris
D. Scott McDonald
Joseph A. Salvati
Stephen R. Stelljes
Copyright Year
2021
Book
Personal Financial Planning for Executives and Entrepreneurs

Print ISBN: 978-3-030-65399-6

Electronic ISBN: 978-3-030-65400-9

Copyright Year: 2021

DOI
https://doi.org/10.1007/978-3-030-65400-9_8