- Please reference individual planning topics for discussions regarding relevant tax planning considerations.
- Tax planning considerations must always remain subordinate to financial, investment, and business considerations. Do not allow the tax tail to wag the financial and investment dog.
- The Internal Revenue Code (IRC, or Title 26 of the U.S. Code) classifies assets and income (or losses) differently according to the treatment of those assets and income (or losses) in the hands of individual or entity taxpayers. Accordingly, different tax treatments apply to each class of asset and income (or loss).
- IRC classifications of assets: Ordinary income assets, capital assets, and Section 1231 assets (subdividable into Section 1245 personalty and Section 1250 realty). Please reference “Real estate investing considerations” topic for discussion regarding Section 1231 as applicable to realty.
- IRC classifications of income (or losses): Active (ordinary) income, portfolio income, and passive income. Generally, losses in one class of income may only offset gains in the same class of income, though exceptions may apply (e.g., the $3,000 net capital loss limitation rule allows excess capital losses, after netting capital gains and losses, to offset up to $3,000 of other income, limited to $1,500 if married filing separately).
- Discrete tax systems encompassed within the IRC: Income tax system, unified estate and gift tax system, and generation skipping transfer tax (GSTT) system.
- Anti-abuse provisions within the IRC to limit tax minimization planning: alternative minimum tax (AMT), at-risk rule limitations, and passive activity rules.
- Available planning strategies to minimize taxation: legal tax avoidance, deferrals of income and taxation, and appropriate applications of tax deductions and credits.
Over and over again courts have said that there is nothing sinister in so arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich or poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.
— Judge Learned Hand, Commissioner v. Newman, 159 F.2d 848, 851 (2d Cir. 1947)
- Costs of complex tax minimization planning tools and strategies must be weighed against their potential benefits. For example, costs, energy, and time committed to the process of income tax planning for minimization of federal income tax liability may equal or exceed costs, energy, and time consumed by federal income taxes. Additionally, commitments of costs, energy, and time for tax minimization planning may be at the expense of financial, investment, and business considerations. Laws and regulations are subject to changes at the discretion of legislators; thus, any tax minimization planning strategy will need to be amended regularly to accommodate changes in laws and regulations. The more complex a tax minimization planning strategy, the greater the expenditures, energy commitments, and time commitments involved in updating and amending the tax minimization planning strategy.