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Tax Planning Strategies

Instructions
Tax avoidance means reducing tax liability through legal techniques. It involves applying knowledge of the tax
code and regulations to personal income tax planning. Use your textbook to determine how each tax strategy
reduces your tax burden and under what financial circumstances the strategy would be helpful. Then state when
you will use each strategy.

Note: You do not have to fit your answers into the size of the pre-determined table cells below. You are welcome
to add additional text to your responses in order to provide detailed responses.

Tax Planning How Does This Strategy Reduce Tax Burden? Under I Will Use This Strategy Now (1-
Strategy What Financial Circumstances Would This Strategy 2 years), in the Near Future (3-
be Helpful? 5 years), in the Future (5+
years), or it Will Never Apply / I
am Not Interested
Premium-Only Plans It allows employees to withhold a portion of their I will use this strategy in the
pretax salary to pay their premiums for employer- future.
provided health benefits. This would be helpful if
you have a large family and visit the doctors office
often.
Transit Spending This employer plan allows you the opportunity to I will use this strategy in the
Account save money by using payroll deduction with pretax future.
salary dollars to pay for work related transporting
expenses. It would be helpful for long work
commutes.
Flexible Spending This allows an employee to fund qualified expenses In the near future
Accounts on a pretax basis through salary reduction to pay for
out-of-pocket unreimbursed expenses for medical
and dental expenses and dependent care. This
would be useful to use when your insurance doesn’t
pay for something such as prescriptions.
Defined Contribution IRS-approved retirement plan sponsored by now
Retirement Plans employers that allows employees to make pretax
contributions that lower tax liability. This would help
when deciding what retirement plans to make.
Prune Taxable Selling investments that have lost value. You then future
Investments use the capital losses to offset any capital gains
earned that year from other investments. You can
also donate stocks that have appreciated in value to
charity. I would use this strategy if my investments
were doing poorly.
Invest with Pretax You do not have to pay taxes this year on the never
Income income. It is an interest-free deferral of income
taxes to another year. I would do this if I had a year
with little money.
Tax Sheltered Income, dividends, or capital gains that are allowed future
Investments to grow without taxes until distributions are taken. I
would use this when I want my investments to grow
at a higher rate.
IRAs Investment account that reduces current year future
income, and the funds in the account accumulate
tax-free. I would look into this when thinking of
retirement plans.
Roth IRAs An individual retirement account of investments Near future
made with after-tax money, the interest on such
accounts is allowed to grow tax-free, and
withdrawals are also tax-free. I would definitely use
this account when I want to put extra money aside
for retirement.
Coverdell Education An IRS-approved way to pay the future education future
Savings Accounts costs for a child younger than age 18 whereby the
earnings accumulate tax-free and withdrawals for
qualified expenses are tax free. I will do this when I
start to save money for my children’s education.
Qualified Tuition Two types – 529 plans prepaid tuition plan. Allows never
Programs Parents, relatives, and friends to purchase a child’s
future college education at today’s prices by
guaranteeing that amounts prepaid will be used for
the future tuition at an approved institution of
higher education in a particular state. I will use this
when family and friends want to help with my child’s
education.
Government Savings Income is exempt from state and local taxes. You future
Bonds may defer the income tax until final maturity or
report interest annually.

Tax-Exempt Long-term debts issued by local governments and future


Municipal Bonds their agencies that are used to finance public
improvement projects. I would use this if I have
debt.
Capital Gains on A big tax shelter is available to homeowners when future
Housing they sell their homes. I consider this when I have a
house of my own.

Defer Income You will not have to pay taxes on income earned future
after December 31st until April the following year or
15 months in the future. I will do this if I need to
delay my taxes.
Accelerate Allows you to lower your taxable income sooner Near future
Deductions rather than later. Many people find that they do not
have enough itemized deductions to exceed the
standard deductions amount. By shifting the
payment dates are some of deductible items, you
can increase your deductions.
Take all Legal Tax It is recommended to take all the tax deductions future
Deductions that you qualify for, thus keeping more tax dollars in
your pocket. Pg. 132 gives several examples of how
to do this.
Shift Income to a When you own your own business you can pay a future
Child child in “earned income.” This assumes the child has
no other income, you can then deduct the payments
as business expenses.
Buy and Manage a If you are able to, you can buy and manage real future
Real Estate estate. Taxpayers are allowed to deduct certain real
Investment estate losses against ordinary taxable income, such
as salary, interest, and dividends, and self-
employment earnings. I want to do this if my
husband and I ever get into real estate.

To finish this Tax Planning Application, complete the Reflection below.


Reflection
Choose 2 of the strategies you indicated you will use “Now.” (If you won’t use 2 strategies now, select 2 that you
will use in the near future.) Identify a dollar amount for both strategies. Then state how the implementation of
the strategy amount will impact your total tax liability; be specific as you state your dollar amounts.

Notes:

 Refer to the tax charts in your textbook and/or the 1040 Tax Tables for 2014 from the IRS website.
 You may use either your current income or your projected income from the career plan you created in
Lesson 02.
 International students need to convert their income and dollar amounts into U.S. dollars in order to use
the U.S. Tax Tables. Conduct an internet search to convert your country’s currency into U.S. dollars.

Example 1: I will save $2,000 this year in a Coverdell Education Savings Account by depositing $200 per month for
10 months to pay for future education costs. I know that contributions to a Coverdell ESA are not deductible, but
amounts deposited in the account grow tax free until distributed.

Example 2: I will contribute $100 a month for 10 months into a Medical Savings Account so I can deduct $10,000
from my adjusted gross income when I file an Idaho income tax return. I know that in Idaho a single person can
contribute up to $10,000 each calendar year and a married couple filing jointly can contribute up to $20,000.

Non-example: I will invest $750 in pretax income divided into the 5 months which remain in the calendar year.
This will decrease my tax liability by moving me down to the next lower income bracket.

Example 1 and 2 are good examples because they include specific dollar amounts for the tax strategy and for the
impact on tax liability. The non-example is insufficient. It does include a specific plan for which strategy to use, the
dollar amount, and how it will be contributed; however, it is lacking the specific details of the tax liability impact.
Dollar amounts are required for both the tax strategy and the impact the strategy will have on your tax liability.

Next Steps
Record your implementation plan for both strategies below. Then submit your Application by following the
instructions in I-Learn.