24669889 Personal Tax Planning Book

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SKANDA Kumarasingam 2010 Page 1

Personal Tax Planning(Over 120 Essential and Timeless Tax Planning Ideas

Applicable to Most Countries of the World)

SKANDA Kumarasingam(Creator of the LEAST Tax Model)


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To

Anne, Ramita and Sahana


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Contents

Dedication

Introduction

About the Author

Chapter 1-Getting Started and Knowing the Terrain

Tip 1-The Essence of the Tax Planning Process

Tip 2-Areas of Personal Tax Planning

Tip 3-Common Mistakes to Avoid

Tip 4Knowing the Events that Trigger Tax Planning Circumstances

Tip 5 Know Important Tax Reduction/Avoidance Ideas

Tip 6- Know the Foundation of Good Tax Plans

Tip 7 Know the Value of Global Analysis in Tax Planning

Tip 8 Know the Importance of Considering All Periods in Tax Planning

Tip 9 Know the Importance of Considering All Parties in Tax Planning

Tip 10 Know the Importance of Considering All Taxes in Tax Planning

Tip 11 Know the Importance of Considering All Other Costs in Tax Planning

Tip 12- Know SAVANT and Consider the LEAST Tax Model

Tip 13- Know the Strategic Implications of Tax Planning

Tip 14-Know the Value of Anticipating in Tax Planning

Tip 15- Know the Art and Science of Value Adding in Tax Planning

Tip 16- Know How and Why to Negotiate in Tax Planning

Tip 17-Transforming in Tax Planning


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Chapter 2-Tax Planning with Employment Income

Tip 18 Know Taxable Benefits and Pay Your Taxes on Them

Tip 19-Nontaxable Benefits Derived from Employment Income

Tip 20 -Deductions from Employment Income for Commissioned Sales People

Tip 21-Income from Employment and Auto (Vehicle) Based Tax Planning-Thinks toRemember

Tip 22- Am I Having Enough Withheld (PAYE Tax)?

Tip 23- Know When and How to Pay Less in Withholding

Tip 24- The Role of Allowances in Adjusting Withholding

Tip 25-Always and on a Continuous Basis Evaluate your Circumstances Dictating theWithholding

Tip 26- Know your Safe Minimum Payment of Withholding and Enjoy the ExtraInterest Income

Tip 27- Choose an Income Tax Filing Status that Best Suits You

Chapter 3-Help! I Can't Pay My Tax Liability

Tip 28- When in Trouble Take Action (Dont Ignore the Issue)

Tip 29-Buy Yourself Time

Tip 30- Borrow and Have a Repayment Plan

Tip 31-Pay by Credit Card (Some Countries are not geared for this)

Tip 32- Negotiate an Installment Agreement with the Tax Department

Tip 33-Propose an Offer in Compromise

Tip 34- In Extreme Situations Declare Bankruptcy


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Chapter 4-Surviving a Tax Department or Authority Audit

Tip 35- Have your Information Ready and Know the Terrain

Tip 36- Know the Triggers of an Audit

Tip 37- Types of Audits and What to Do

Tip 38- Know and Exercise Your Rights during an Audit

Tip 39- Some Crucial Things to Know and Do

Chapter 5-Tax Benefits of Home Ownership

Tip 40- The Benefits and Limits of Home Ownership

Tip 41- The Pitfalls of Improvements and Repairs

Tip 42- Knowing How to Adjust Home Purchase Costs

Tip 43- Planning the Sale of Your Home

Chapter 6-Tax Planning for Income

Tip 44- Some Ways to Reduce or Defer Your Income Tax

Tip 45- Shifting Income to Lower Tax Brackets

Tip 46-Take All Deductions Possible at the Right Time

Tip 47- The Basics of Investment Tax Planning

Tip 48-Year End Planning

Chapter 7-Tax Planning for the Self-Employed

Tip 49-Business and Self-Employment Expenses Must be Documented

Tip 50- Document Work Content and Salaries Paid to Family Members


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Tip 51- Methods to Reduce Self-Employed Business Corporate Taxes

Tip 52-Understand and Comply with Your Tax Responsibilities

Tip 53- Making Your Tax Payments on Time

Tip 54- Some Methods of Reducing the Self- Employment Income

Tip 55- Choose the Best Retirement Plans with Tax Benefits

Tip 56-Tax Planning Issues with Your Retirement Savings Plans

Tip 57- Credit Proof Your Retirement Plan

Tip 58- Plan the Timing of Inflows and Outflows to Your Retirement Plans

Tip 59- Issues of Transforming Retirement Plans to Annuity

Tip 60 -Deduction of Business Expenses

Tip 61-Interest Expense Deductibility

Tip 62-Taxes and the Power of Personal Corporations

Chapter 8-Taxation of Investments

Tip 63-Differnent Types of Investment Incomes and Their Taxes

Tip 64- Value of Tax- Exempt and Tax Deferred Income

Tip 65- How to Vary the Basis of Your Investments for Maximum Tax Advantage

Tip 66- Circumstances Can Change the Tax on Capital Gains. So Use Them Advantageously

Tip 67- Match Capital Losses with Capital Gains

Tip 68- Plan your Investment Income and Expenses

Tip 69-Capital Gains or Ordinary Income

Tip 70-Ideas Related to Interest Expense Deductibility


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Tip 71- If in Doubt Ask for Help

Chapter 9-Year-end Tax Planning

Tip 72-Art of Income Splitting and its Perils

Tip 73- Tax Projections

Tip 74- Adjusting the Final Withholdings Based on the Tax Projections

Tip 75- Realize that the AMT Snags everyone and Plan for it

Tip 76- Play the Timing Game

Tip 77- Giving Gifts Can be Good Tax Planning

Tip 78- Maximize Pretax Contribution to a Retirement Plan

Chapter 10-Personal Deduction Planning

Tip 79- The Game of Deduction Planning

Tip 80-Should you itemize or standardize?

Tip 81- Medical and Dental Expenses Deductions

Tip 82- Balancing the AGI to Consider the Itemized Deduction

Tip 83- Plan the Timing of Your Itemized Deductions

Tip 84-Accelerating Deductions/Postponing Income

Tip 85-Accelerating Income/Postponing Deductions

Chapter 11-Qualifying for the Home Office Deduction

Tip 86- The Advantages of a Home Office


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Tip 87- Make Sure Your Home Office is according to the Definition

Tip 88- Tax Benefits of Taking Work Home

Tip 89- Deductible Expenses of Your Home Office

Tip 90- Deductions and Carry Forwards of Losses

Tip 91- Avoiding the Tax Department Scrutiny

Tip 92- Know the Perils of Tax When Selling Your Home with a Home Office

Chapter 12-Understanding Personal Tax Credits

Tip 93- Discern the Value of Tax Credits

Tip 94- Possible Tax Credits

Chapter 13-Tax Planning Tips on Auto Insurance and Long

Term Care InsuranceTip 95-Dividends from Life-Insurance Policies

Tip 96- Vehicle Expense Deductions

Tip 97- Tax Benefit to Cover Vehicle Casualty or Theft

Tip 98- Benefits not Covered by Auto Insurance Can Also be deducted for Tax

Purposes

Tip 99- Consider the Tax Benefits of Different Long-Term Care Insurance Policies

Tip 100- Judge the Limits on the Tax Free Benefit of a Long Term Care Insurance

Policy


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Chapter 14-Tax Planning in Un-Chartered Seas- Using the

Internet for Tax Leverage

Tip 101- Know and Use the Location Tax Advantage

Tip 102- Know and Use the Nature of Product to Your Tax Advantage

Tip 103- Know and Use the New Marketing Techniques to Your Tax Advantage

Tip 104- Know and Use New Types of Assets to Your Tax Advantage

Tip 105- Know and Use Remote Workforce to Your Tax Advantage

Tip 106- Making Optimal Use of the Internet May Challenge Old Rules so Use it to

Your Tax Advantage

Tip 107- Know and Use the Nature of Transactions to Your Tax Advantage

Chapter 15-International Tax Planning-Basic Techniques

Tips 108- The Hazards are high and so are the Rewards.

Tip 109- Know the Essence of International Tax Planning

Tip 110- The Method of International Tax Planning

Tip 111- Know the Tax Havens and the Risks of Them Changing

Tip 112- Finding Loopholes

Tip 113- Old and New Tricks

Tip 114- Tax Avoidance and Evasion in International Tax Planning

Tip 115- How Legitimate Plans Become Evasion (The Need for Constant Vigilance)

Tip 116- Further Techniques of International Tax Planning

Tip 117- Avoid Evasion at All Costs


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Chapter 16- Tax Avoidance and Tax Evasion

Consultation Support


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Introduction

This book is like a double edged knife.

It is effective and powerful in the hands of a skillful and capable tax planning

craftsman and may not be so to the uninitiated. It has been written with a wide

readership in mind such as individuals who are desirous of tax planning and those

who make decisions on behalf of a company (say as an accountant) or give advice to

companies or individuals in the capacity of a seasoned financial consultant.

Whatever your genre this book will highlight very important concepts and tips for

tax planning.

Every time the tax legislation changes you will have to read through this book as the

tips that have been provided are timeless and do not relate to a particular taxation

system (it considers many of the tax systems I have worked in and the United States

of America systems. I have considered the US system as it is the most widely

documented and oft duplicated system throughout the world) nor applicable to an

individual country or a particular year of taxation. The concepts and tips that have

been highlighted in this book should always (on a continuous basis) be considered

as taxation is probably the biggest cost of any individual or a corporation as

explained in the next paragraph.

Even though it is rarely realized taxation is most probably the biggest cost for any

organization or individual. As 75% (besides income tax, property tax, municipal or

provincial council tax, social responsibility taxes, stamp duties, high and exorbitant

import taxes, entertainment and excise taxes of their profits are taken away by the

government) and nearly 45% if youre an individual careful planning using

legitimate methods should save the organization or the individuals substantial

amounts of money to improve their businesses or living standards.


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Whether you are an individual or make decisions on behalf of a company (say as

Accountant) or give advice to companies or individuals in the capacity of financial

consultant taxation plays an important role in decision making. Decision making in

Management is defined as a part of the planning process which includes selecting

the best option amongst a given set of alternatives.

We know that individuals make certain decisions which have tax implications such

as investment decisions like buying a house or a car or motor vehicle for personal

use or sending their children to college or university. Certain highly personal

decisions such as marriage, divorce, separation, retirement planning, taking

insurances and even death (estate planning) involves decisions where tax plays a

very important role.

Consider the following scenario. Your best friend, who lives in Sydney, calls you

with the news that she has just inherited a large amount of cash. She asks for your

help in investing it in mutual funds (a form of unit-trusts) which primarily holdbonds and shares. Assuming she can even invest it globally looks in the newspaper

or Web site which shows the current earnings of various bond funds. Pick five at

random, and calculate their average yield. Now do the same for a five which have

the words tax exempt in their names. (For the uninitiated, this means that these

funds invest primarily in treasury bonds issued by the government.) Interest paid

on such securities almost always is exempt from the income tax, the rate of which

ranges from 15% to 30% for most investors. What is the difference in the average

yields of the first set and the tax exempt set? Could a significant part of this

difference be accounted for by tax effects? Confusion about the taxation system can

cause the wrong yield calculation and embracing the wrong decision.

Tax planning can affect decision-making even in the most commonplace of settings.

Consider the case of a typical homeowner in a particular country which we shall call

Microasia, whose annual property tax payment (called net annual value) on her


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house must be paid before April of the next year, and it is now March. Almost all

people who pay income tax calculate the tax based on their net income - that is, their

taxable revenues less their tax deductible expenses - occurring in each tax year.

Assume that the property tax is a deductible expense, and that she is in the 28% tax

bracket. (As you may know, this means that for every DOLLARS of additional

income, she would pay DOLLARS 0.28 in additional tax. Similarly, for every

DOLLARS of tax deductible expense, she would save DOLLARS 0.28 in taxes.) If she

pays the property tax in March, she gets a tax deduction on her tax return for the

current year. The tax benefit is delayed a year, however, if she waits until April to

pay. That is, simply by paying this deductible expense a few days earlier, she will

generate tax savings a year earlier. This simple bit of planning results in tax benefits

through timing, an important component of tax planning discussed in detail

throughout this book.

On the other hand we all know that decisions made by businesses can have their tax

impact. This fact is highly emphasized but is not covered in this book. My

forthcoming book titled Corporate Tax Planning will highlight how tax planning canbe undertaken by organizations. Decisions such as capital structures, (whether to

fund the company operations by debt or equity) operations planning, selecting

strategic partners with different tax clienteles, tax forecasting, internet based tax

planning, international tax planning, balance sheet tax planning and dividend policy

(or payment) are some examples of this.

Taxes are only one of the many factors which people and organizations consider

when making decisions. In some case, taxes are a dominant factor; in others, tax

considerations play a minor part. Good decision makers generally seek to manage

taxes on every transaction. It is in your hands to take action.

Skanda Kumarasingam

Sydney, Australia

1 January 2010


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About the Author

Skanda Kumarasingam was a facilitator to many distinguished foreign Masters and

Bachelors programmes offered in Sri Lanka by the American Central University (USA),

American City University (USA), Troy State University (USA), University of Manipal (India),

Curtin University of Technology (Australia) and Leeds Metropolitan University (UK). He

also possesses vast primary research skills and has supervised over thirty five theseswriting for MBA programs.

He was a corporate coach specializing in finance, operations and change managementthrough the Centre for International Education and Training from the Torrens Valley TAFE

South Australia and EdExcel of UK.

In the past Skanda lectured/facilitated study programs leading to the professional

examinations conducted by the Institute of Chartered Accountants of Sri Lanka, Society of

Certified Management Accountants of Sri Lanka, Association of Accounting Technicians ofSri Lanka, Sri Lanka Institute of Marketing, Chartered Institute of Marketing (UK),

Association of Business Executives (UK) and Institute of Chartered Secretaries andAdministrators (UK).

Skanda counts over 10 years of lecture and facilitation experience. Before becoming fully

involved in education he was a senior manager and professional primarily in general

management and management accounting roles either with profit centre responsibility orin supporting senior managers with profit responsibilities. He has held senior management

roles in KPMG (Audit and Consulting), Coke (Regional Internal Auditor and Leader-

Financial Impact Teams in the Asian Region), PepsiCo, Marks and Spenser (UK) ,

Gap(Singapore), Next (Singapore) and Ernst and Young (Business Training Centre-

Kingdom of Bahrain).


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Skanda has over 15 years experience in senior management and professionalbusiness training roles. During this period Skanda developed many tools and

techniques to aid management in managing and controlling costs and improving

profits. His models which include the Profit Maps (for profit improvement and costreduction) and the LEAST Tax Model (for proactive tax planning) have been widely

used in many organizations and its branches and sub-units saving them large

amounts of dollars in costs and dramatically improving profits.

Skanda is a qualified Chartered and Management Accountant. He earned his MBA

from the University of Lincoln UK. He has many professional qualifications inQuality Management, Supply Chain Management and Taxation.

Skanda is the author of four books - The Profit Maps Model, The Profit Maps Model

Workbook, Personal Tax Planning and Economics- A Textbook. The first two books havebeen used in workshops and training sessions by him with great success. These two books

and the Personal Tax Planning book have been widely distributed in e-book form and madeuse by many organizations and individuals. The Economics textbook was adopted in many

teaching institutions where Skanda was a lecturer. All these books are available free forreading (without abbreviation) in the Scribd website.

His ideas on profit improvement cost reduction can be found on his web-site

www.profitmaps.com.au. Skanda can be contacted by email [email protected].

Skanda lives with his wife Anne and two daughters Ramita and Sahana in Sydney, Australia.


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Chapter 1

Getting Started and Knowing the Terrain

Tip 1-The Essence of the Tax Planning Process

Global tax minimization requires the application of global tax laws and regulations

to the unique facts of each individual. Knowing the process well is essential if youare to obtain the best benefit of saving a large portion of your income from the Tax

Department or Authority in a legitimate manner and using your tax professional

effectively. Effective tax planning requires proper execution through the followingprocess:

Getting Started: The initial steps of the project are critical to the success of theproject. Critical components include identifying the members of the team,setting parameters and guidelines for the team and establishing the first draft ofa timeline and budget for the project.

Identifying the opportunities: Opportunities for global tax minimizationdepend on many factors including the individuals or their firms industry,

geographic reach, financial and structural flexibility, risk tolerance and

resources. During the opportunity assessment phase of the project thesevariables should be used to identify tax planning opportunities that areappropriate to the individual or his or her firm if self-employed.

Evaluating Alternatives: Once the list of opportunities is developed, the nextstep for the Project Team is to evaluate each of the opportunities. The analysis

should include tax-technical, legal, financial and operational components. The

product of the analysis is a ROI analysis that can be used to select from the list of

opportunities those planning strategies that have a high probability ofimplementation.

Feasibility and Design: The feasibility and design phase of the project shouldinclude an identification of the key tax-technical and business issues, review and

comment by the firms legal and accounting advisors and a list of the primary

implementation steps. As a further step, the Project Team should identify theimplications of unwinding the strategy if necessary. The completion of the

feasibility and design stage should result in approval for the implementation ofthe tax planning strategy by the individual or appropriate officers of the firm if

self-employed.

Implementation: Implementation of a global tax planning strategy couldrequire extensive involvement from many parties depending on the nature of

the project. The implementation phase should involve the preparation of an

implementation plan and should include clear communication to the impactedparties. Implementation steps may include formation of new entities, changes inhow the Company operates its business, creation of Intercompany agreements

and pricing arrangements and transfers and assignments of employees,contracts, assets and liabilities. The conclusion of the implementation phase of


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the project is a fully implemented strategy that is documented and integratedinto the firms daily operations.

Post implementation review and maintenance: Once the tax planningstrategy is implemented, the Project Team should have a plan to monitor the

global tax planning strategy to determine if the strategy is being adequately

supported and that the benefits of the strategy are being realized. Review of the

implemented strategy should become an integral part of future global taxplanning activities.

Tip 2-Areas of Personal Tax Planning

This should cover the following at least for the individual and members of thefamily.

Maximizing the use of personal annual exemptions and basic rate bands Capital Gains Tax planning Planning for retirement Inheritance tax reviews International issues and trusts

If self employed then business/company planning should also include

Structuring your business and managing change Acquisitions and disposals Year end planning Optimizing tax treatment of income and expenditure Tax efficient withdrawal of funds Personal Service company planning

You may also have to consider employee issues which have tax implications such as

Cars- personal or company ownership Avoiding Scale charges for fuel Other aspects of employee packages including shares, relocation, and

travel expenses Nonresident employees Assistance with pension planning

Tip 3-Common Mistakes to Avoid

The biggest mistake made is waiting until too late in the year to assess yourtax obligation. Often its too late to take action or cash is not available to

handle the obligation


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Making a financial decision without conducting alternative tax obligationscenarios. Buying and selling a home, business, or investment are commonexamples

Under or over withholding taxes Not taking full advantage of tax free and tax deferred programs Not keeping adequate records of deductible expenses Not protecting your assets from the final tax bite should you pass away

(Estate Planning)

Overlooking charitable donations Using non deductible consumer debt (credit cards and auto loans) instead of

deductible, Home Equity debt instruments

Failing to take into account changing tax brackets amounts. This is importantwith the lower tax brackets available for certain capital gains

Failing to take advantage of tax credits and all allowable deductionsTip 4Knowing the Events that Trigger Tax Planning Circumstances

There are a number of events that should trigger a review of your tax situation. The

following is a list of the most common. Seek advice and run alternative tax scenariosprior to deciding the best approach for your situation when:

You borrow money You decide to pay off a loan You are planning for retirement You buy or sell stock (shares) and mutual funds You consider adding to or withdrawing from a tax deferred savings program You are retiring You are getting married or divorced You buy or sell your home You want to make a large gift to a child or relative You are considering a move (change of location) You are considering starting, buying or selling a business You are incurring business expenses as an employee You are buying or selling business equipment You are holding an uncollectible note You are considering a large charitable gift You are buying or selling any kind of property You incur or expect to incur large medical expenses Your employer offers you a lump sum payment of your pension versus an

annuity

You incur or expect to incur large education expenses


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Tip 5 Know Important Tax Reduction/Avoidance Ideas

To benefit the most from tax planning and avoid the common mistakes mentioned

earlier, develop a tax strategy for your situation. The strategy should incorporatethe following planning principles:

1. When is the best time to complete a transaction that impacts your taxsituation?

2. How do you reduce your overall tax burden? What options are available?3. Defer any tax obligation, penalty free for as long as possible4. Match high income with high expenses whenever possible5. Consider your marginal tax bracket when making decisions. The next dollar

you earn could be taxed from 10% to over 35%

Some common tax planning and tax avoidance ideas are:

Invest fully in tax deferred programs Explore all the retirement plan programs Take full advantage of the interest deductibility of your home mortgage and

home equity loans versus credit card debt or other loans

Look into Annuities for their tax benefits Explore using tax deferred cash value life insurance If you have a casualty loss, shift income to the same year to maximize the

available writes off

Buy tax-free treasury bills, bonds and bond funds

If you own a home, consider making an additional payment to shift interestexpense into a high income tax year

Begin planning for retirement early. Conduct income forecasts andcontinually rebalance your estate to reduce taxes

Take advantage of the expense option for depreciable assets of your business Consider gifts to minors and beneficiaries over time to reduce investment

income and future estate taxes

Consider business use of your home to capture business expense deductions Plan other capital acquisitions and sales to offset gains with losses and to

capitalize on lower long-term capital gains tax rates

Consider like-kind exchanges to reduce capital gains tax exposure. If youintend to buy replacement property you can effectively defer a taxable gain

into the future with a like-kind exchange

Take advantage of the capital gain exclusion Advantage of low taxation on WHT


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Tip 6- Know the Foundation of Good Tax Plans

Base the tax plan on sound legal authority. Usually the Primary authorityplays the vital role who may be the Commissioner General of the Inland

Revenue or his designated representatives. Pay attention to the rank and

permanence of the authority. Please note that as the level of authority

decreases, the level of risk increases.

Do not carry a good plan too far. Tax plans tend to multiply geometricallyso do not put too many feathers on the dog. Restrain the naturalenthusiasm in favor of realism. Keep it simple and remember you have to

explain it if the need arises. Also complex plans tend to attract attention as

many have used complication and smoke screen effects to pull the wool

over the eyes of the tax authorities and failed.

Make it flexible. The plan should be adaptable to changing conditions, to thechanging fortunes of the taxpayer and from internal and external forces.

Integrate the tax plan with other factors in making decisions. The planshould fit within the proper position with other business variables as tax isonly one business cost. Also keep in mind other forms of taxes that could be

saved as income tax may not be the only tax involved. Keep the overall

business objective in mind.

Find out if a similar plan has been unsuccessful. This is evidenced by courtcases and rulings. Avoid needless duplication and assess risks. Consider the Maximum Exposure. What if the plan fails? The law changes?

Risk calculable should be assessed along with the net costs or tax savings.Risk incalculable includes uncertainty, stress, and other psychological

factors.

Consider the effect of timing. Use present value methods but remember allof the assumptions that go into present value computations(the discount

rate to use ,IRR, future actions and what time period to consider)

Shape the plan to the tax payers needs which may include tax location ofthe taxpayer and where he wants to go. The consultants objective is to

understand and craft a plan to ensure the most economical way to getthere.


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Tip 7 Know the Value of Global Analysis in Tax Planning

Consider all of these in any proposed transaction to consider the tax implication:

All periods- How taxes are affected at each point in time All parties- The tax attributes of each party to the transaction All taxes- Consider both explicitand implicittaxes All other costs- Tax minimization might require the assumption of non-tax

costs

Tip 8 Know the Importance of Considering All Periods in Tax Planning

Transactions often have tax effects spanning many years. It is important toconsider the effects in all years. This often requires speculation regarding what the tax system will look like

in future years.

Present value is a critical concept when comparing tax savings today fromone transaction with tax savings in the future from another.

E.g., you can sell stock today, realize a gain, and reinvest in a pension, or waituntil you retire to sell the stock.

Tip 9 Know the Importance of Considering All Parties in Tax Planning

Most transactions (which have tax implications) involve at least two parties. Good tax planning involves the minimization of total taxes paid by all parties. You should be willing to structure a transaction in a way that costs you

DOLLARS 1,000 in extra taxes if it saves the other person DOLLARS 2,000 in

taxes. This is good for both of you if you adjust the price DOLLARS 1,500 inyour favor. After taxes, both of you are head by DOLLARS 500.

E.g., you can buy a machine for your business or lease it. The key differencetax wise is who can depreciate it. If you are paying AMT, depreciation is lessvaluable to you, so lease.

Tip 10 Know the Importance of Considering All Taxes in Tax Planning

You must consider taxes besides income tax. Many transactions differ in theireffects on provincial council or state income taxes, property taxes, transfer

(estate and gift) taxes, and foreign income taxes. e.g., a company needsmoney. It can borrow through its U.S. parent or its German subsidiary.


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An important tax is implicit tax. Implicit tax is the extra price (lowerreturn) you must pay to acquire tax favored assets. This is a cost imposed ofyou in lieu of explicit tax. e.g., AAA rated corporate bonds pay 6%, while AAA

rated municipal bonds pay 4%. The 2% lower return is an implicit tax on

treasury bills or bonds.

Tip 11 Know the Importance of Considering All Other Costs in Tax Planning

It is often the case that tax advantaged transactions have undesirableconsequences. These must be factored into the analysis.

The objective is not to minimize taxes, but to maximize wealth (or moregenerally, the economic concept of utility).

E.g., having children provides several tax benefits, but children cost more toraise than the tax savings.

Tip 12- Know SAVANT and Consider the LEAST Tax Model

Any good tax plan should consider the following to take a holistic view of the

situation. This is a very powerful acronym used for tax planning.

Strategic- Only consider tax plans that are consistent with overall economicstrategy.

Anticipated- Forecast future tax conditions. Value Adding- The objective is to maximize the present value of after-tax

profit.

Negotiated- Maximize total tax benefit and spread the gain across all parties. Transforming- Convert unfavorably taxed items into favorably taxed items.

Note- An even more powerful model than the above called the LEAST Tax model hasbeen developed, tested and used in global companies by the author. However this

model is proprietary and used with specially developed diagnostic software and

tools and hence details are not disclosed here. In almost all cases the model

identified over 40% savings from clients current tax bill over a time horizon of 5

years. That is on average a 40% savings X 5 years is achieved which is equal to200% of the current tax bill. For information regarding the use of this model see theconsultation support page.

Tip 13- Know the Strategic Implications of Tax Planning

Overall economic strategy is generally independent of tax considerations.Strategy provides focus, limiting the set of options we need to consider.


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It is important to know that the tax tail should not wag the strategy dog.Ask yourself, what you want to accomplish, and then consider how taxplanning can help. E.g., your strategy might be to financially prepare for a

secure retirement at age 55. You could then consider tax advantaged saving

and investment tools to achieve that goal.

Tip 14-Know the Value of Anticipating in Tax Planning

When a transaction affects future years, both current and future taxconditions are relevant.

Tax conditions change for two reasons which are tax law revisions and whenthe tax situation changes (e.g. paying AMT).

Tax law changes can have direct and indirect effects (implicit taxes). E.g., acut in tax rates should cause municipal bond prices to fall. We can deal with an uncertain future by forecasting tax changes, and

providing contract flexibility (escape hatches).

Tip 15- Know the Art and Science of Value Adding in Tax Planning

This is the cold arithmetic of tax planning. We should strive to maximizevalue and not minimize taxes.

The objective is to maximize the present value of after-tax economic income(or cash flow).

Tax deferral is usually valuable due to the time value of money consideringthe financial importance of the present value calculation. Present value-

Cash today is more useful than cash in the future. Thus, when comparing

transactions which provide (or cost) you cash at different points in time,these cash flows must be adjusted to a comparable basis. This is done by

converting any future cash flow to its present value.

Tradeoffs must often be made between tax and non-tax considerations, suchas risk sharing, information asymmetry, and frictions and transaction costs.

Tip 16- Know How and Why to Negotiate in Tax Planning

Generally seek to maximize the total tax benefits of all parties to thetransaction.

Share the tax benefits with the other parties. This involves carefulnegotiation of prices to ensure that all parties are happy.

Choose counter-parties wisely. Those with different tax attributes from youoffer the best tax planning prospects. (Tax clienteles). e.g., you are paying

AMT and want to lease a machine rather than buy it, so that the leaser can


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use the depreciation. The ideal leaser does not pay AMT and is in a high taxbracket. Such a person could offer the best lease terms.

Tip 17-Transforming in Tax Planning

If possible, adjust transactions to convert unfavorably taxed items into favorably

taxed items as shown below

Taxable income to Tax-free income Ordinary income to Capital gains (low rate) Current income to Future income Non-deductible expense to Deductible expense Capital or passive loss to Ordinary loss

Transformation examples

Taxable income to tax-free income:

selling corporate bonds and buying municipal bonds donating appreciated property to charity

Ordinary income to capital gains:

selling corporate bonds and buying stock selling an asset before it realizes income

Current income to future income:

borrowing money instead of selling stock delaying payments received by a cash basis seller

Nondeductible expense to deduction:

rationalizing a valid business purpose to a consumption activity using home equity loans to buy consumer durables rather than securing

loans with the durables

Capital loss to ordinary loss:

create capital gains from ordinary incomePassive loss to ordinary loss:

borrow money to invest in a profitable passive activity (e.g., real estate)


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Chapter 2

Tax Planning with Employment Income

Tip 18 Know Taxable Benefits and Pay Your Taxes on Them

Taxable benefits derived from employment income include those given below andyou should pay all your dues on them on time. Under no circumstances should you

end up with tax- evasion (willful non-payment of your legal due)

The value of most benefits derived from employment is included in personalincome. For instance employees who are rewarded near cash merchandise

such as gift certificate must take their fair market value of that award intoaccount as taxable income

The value of the discount on university tuition fees offered by an employer orto their spouses or children would normally be considered employment

income and therefore represent a taxable benefit to employees

Employers or its employees who receive periodic payments under thedisability insurance plan, sickness or accident insurance plan or income

maintenance insurance plan to compensate for loss of income from an office

or employment must include that amount in income if the plans premiums

are paid for by the employer. However they may deduct from income theamount they may have personally contributed towards such a plan.

Employees who exercise an option to purchase an automobile from theiremployer at less than their fair market value are considered to have receiveda taxable benefit for the difference between the price paid and the fair

market value.

Flexible employee benefit programs which allow employees to custom designtheir own package of health and other benefits are now very popular in theworkplace. Take care when structuring such plans however because taxable

benefits can result. If for example an employee accumulates taxable creditsand those benefits are received in cash that amount is generally consideredtaxable income.

Tip 19-Nontaxable Benefits Derived from Employment Income

Although most benefits derived from employment must be included in personalincome there are some exceptions. They include employers contributions to private

health service plans, group sickness or accident plans, registered pension plans, and


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deferred profit sharing plans. Think how you can transform them into nontaxablebenefits so that the take pie is made bigger for you. This is usually a powerful

planning tip for any business executive when negotiating their pay-and benefits

package with their employers or potential employers

The examples of non taxable benefits include but are not limited to

Ordinary discounts on the employer's merchandise available to allemployees on an indiscriminative basis

Subsidized meals available to all employees provided a reasonable charge ismade to cover direct costs

The cost for distinctive uniforms, protective clothing or footwear required tobe worn during employment including related laundry expenses

Reimbursement of moving expenses upon relocation Receipt of up to a limited number of noncash gifts such as for Christmas

wedding or birthday in one year. If you receive more than two noncash gifts

or awards from your employer select those with an aggregate cost closest to

the maximum limit that is allowed by the law.

Non-cash awards for meeting or exceeding targets. Again there may be alimit on the number of gifts that can be given or the maximum amount that isapplicable.

Use of employers recreations facilities or employer sponsored membershipin a social club where such membership is considered beneficial to the

employer.

Mobile phones used for business purposes An employer mandated medical examination required as a condition of

employment

Employer sponsored personal counseling services in respect of mental orphysical health upon layoff from employment or retirement

Employer sponsored travel to where the trip was undertaken predominantlyto business reasons

Tuition and related fees if the course is required for employment and isprimarily for the employers' benefit


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A reasonable per kilometer or automobile allowance (named asreimbursement)

Board and lodging and transportation to special work sites where theemployee is required to be a reasonable distance away from their principal

residence

A reasonable employer provided allowance for an employee's child to leavethe current school and attend the nearest suitable school if one is not close to

where the parents must reside for employment purposes

Employer paid expenses for moving an employee and his family along withhousehold effects out of a remote location upon the termination of

employment

Employers provided computer and internet service if employee requiressuch a service to carry out their business obligations. However it is used for

personal the reasons it would result in a taxable benefit

Home office if required essentially by the employer to work from home. Apart of the salary can be structured to state it is only a reimbursement of rent

expenses. Documentation is essential.

If you use air miles earned from an incentive program for personal use youwill be deemed to have received a taxable benefit if those points were earnedas a result of expenditures paid for by your employer. To avoid that situation

you should be careful to use such air miles strictly for business purposes on

behalf of your employer.

Tip 20 -Deductions from Employment Income for Commissioned Sales People

Commissioned salespeople if required by contract to pay their own expenses may beable to deduct those expenses against commission income. If your expenses exceed

commission related income there may be alternative methods of making claims

available to you.

If you are a commissioned employee consider leasing rather than purchasing capitalequipment such as a computer where capital allowance is not allowed

Commissioned sales employees who work in their homes should ensure that aseparate business telephone line exists in order for regular phone expenses otherthan business long distance charges to be deductible


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Tip 21-Income from Employment and Auto (Vehicle) Based Tax Planning-

Thinks to Remember

Keep a record to support business mileage Travel between your home and employers' office is generally considered to

constitute personal rather than business use of the automobile. If however

you are required to make a business stop between your home and office at

the request of your employer the entire distance traveled throughout the day

may constitute business rather than personal use.

Employer subsidized parking must be included in income if the benefit isbeing provided primarily to the employee. However if the parking spot is also

provided for the benefit of the employer to enable the employee to use hisautomobile in the course of carrying on business related duties during officehours or is required to work late hours a portion of this amount might be

reduced or waived off.

If you have an arrangement with your employer that involves a combinationof both a flat rate and a per kilometer travel allowance for the same vehiclethe tax treatment might be complex particularly if some automobile expenses

also reimbursed. Your accountant should be able to assist in this process

Tip 22- Am I Having Enough Withheld (PAYE Tax)?

If you fail to estimate your income tax properly, it may cost you in a variety of ways.

If you receive an income tax refund, it essentially means that you provided the TaxDepartment or Authority with an interest-free loan during the year. By comparison,

if you owe taxes when you file your return, you may have to scramble for cash at taxtime--and possibly owe interest and penalties to the Department as well.

For instance if you are an employee who is making regular retirement contributions

request that the amount of income tax withheld on your paycheck be reduced in

order to reflect the saving those conditions will bring. This is a more efficient way to

manage your money than paying tax upfront and then waiting for the refund thefollowing year.

When determining the correct withholding amount (PAYE) for your salary or wages,

your objective should be to have just enough taxes withheld to prevent you from

incurring penalties when your tax return is due. (You may owe some money at the

time you file your return, but it shouldn't be much.) You can accomplish this byreading and understanding Tax Department or Authority Publications and properly

completing the required forms (and accompanying worksheets), and providing an


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updated information sheet to your employer when your circumstances changesignificantly.

Tip 23- Know When and How to Pay Less in Withholding

Two factors determine the amount of income tax that your employer withholds

from your regular pay: the amount you earn and the information you provide to

them about your special tax circumstances like having a housing loan or other taxlosses that may be deductible from your employment income which of course has

the Tax Department or Authoritys approval and blessings. Get the Tax Departmentor Authority approval for a reduced tax withholding on your employment income in

the specified forms and submit it to your employer. Even consider if you have any

brought forward tax losses.

Tip 24- The Role of Allowances in Adjusting Withholding

You must understand allowances. Think of allowances as cash in your pocket at the

time that you receive your paycheck. The more allowances you claim, the less taxesare taken from your paycheck (and the more cash ends up in your pocket on

payday). For example, you can maximize the amount withheld from your paycheck

to ensure that you have enough tax withheld to cover your tax liability by claimingzero allowances. This will reduce the amount of cash you take home in your

paycheck. The following factors determine your number of allowances:

The number of personal and dependency exemptions that you claim on yourincome tax return

The number of jobs that you work The deductions, adjustments to income, and credits that you expect to take

during the year

Your filing status Whether your spouse works Childs income

Tip 25-Always and on a Continuous Basis Evaluate your CircumstancesDictating the Withholding

The law requires your employer to let you change your allowances at any time. Youdo this by submitting a required form usually styled and issued by the Tax

Department or Authority to your employer. Changes in your personal life, as well aschanges in the tax law, may result in your having too little or too much tax withheld

from your paycheck. If you get married, buy a home, have a baby, or experience anyother major financial life change, consider re-evaluating your withholding. And in

some cases, such as divorce, you may be required to submit a new form.


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Tip 26- Know your Safe Minimum Payment of Withholding and Enjoy the Extra

Interest Income

If you accurately complete all worksheets and don't have significant non-wage

income (e.g., interest and dividends), it's likely that your employer will withhold anamount close to the tax you owe on your return. In the following cases, though,

accurate completion of the worksheets alone won't guarantee that you'll have thecorrect amount of tax withheld:

When you are married and both spouses work When you are working in more than one job

When you have significant nonwage income, such as interest, dividends,alimony, unemployment compensation, or self-employment income

When you'll owe other taxes on your return, such as self-employment tax orhousehold employment tax

In these cases, the Tax Department or Authority Publications or advice from the Tax

Payers Assistance Unit can help you compare the total tax that you'll withhold forthe year with the tax that you expect to owe on your return. It can also help you

determine any additional amount you may need to withhold from each paycheck to

avoid owing taxes when you file your return. Alternatively, it may help you identifyif you're having too much tax withheld.

Remember in many countries that as far as you pay your quarterly taxes to be in par

with last years actual tax liability divided by four (to arrive at the quarterly liability)then you will not be fined provided the shortfall is paid subsequently on or beforethe due date.

If you predict a higher tax payment you may pay the safe minimum suggested above.

However if you predict a loss or reduced tax in the current year consult your tax

professional on advice as to how much to pay so that you do not give the TaxDepartment or Authority an interest free loan. Keep the extra money in the Bankand you enjoy the interest income.

Tip 27- Choose an Income Tax Filing Status that Best Suits You

Selecting a filing status is one of the decisions you'll make when you fill out yourincome tax return, so it's important to know the rules. And because you may have

more than one option, you need to know the advantages and disadvantages of each.

Making the right decision about your filing status can save money and preventproblems with the Tax Department or Authority down the road.


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Your filing status is especially important because it determines, in part, the tax rateapplied to your taxable income, the amount of your standard deduction, and the

types of deductions and credits available. By choosing the right filing status, you can

minimize your taxes.

Some country legislations will only have a single filing status (like in Malaysia and

Australia) whilst others may have several. Also the number and features couldchange from one year to another. For example the usual tax filing statuses found are

Single Married filing jointly Married filing separately Head of household Qualifying widow/er with dependent child.

There are various income tax brackets. Your tax rate depends on your filing status

and the amount of your taxable income. So, it's clear that some filing statuses aremore beneficial than others.

Although you'll generally want to choose whichever filing status minimizes yourtaxes, other considerations (such as a pending divorce) may also come into play.

You're single if you're unmarried or legally separated from your spouse on the lastday of the year -This one's pretty straightforward. Depending on your

circumstances, it may be your only option. Your filing status is determined asof the last day of the tax year .To use the single status, you must beunmarried or separated from your spouse by either divorce or a written

separate maintenance decree on the last day of the year. Unfortunately, you

jump into a higher tax bracket more quickly with the single status than with

some of the other filing statuses.

Married filing jointly often results in tax savings for married couples -You may filejointly if, on the last day of the tax year, you are

1. Married and living together as husband and wife2. Married and living apart, but not legally separated under a divorce

decree or separate maintenance agreement, or3. Separated under an interlocutory (i.e., not final) decree of divorce

Also, you are considered married for the entire tax year for filing statuspurposes if your spouse died during the tax year.

When filing jointly, you and your spouse combine your income, exemptions,

deductions, and credits. Filing jointly generally offers the most tax savings for

married couples. For one thing, there are many credits that you can take if


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you file a joint return that you can't take if you file married filing separately.These may include like in many countries the child and dependent carecredit, the adoption expense credit, and the Lifetime Learning credit.

Still, this filing status is not always the most advantageous. If your spouse

owes certain debts (including defaulted loans and unpaid child support), the

Tax Department or Authority may divert any refund due on your joint taxreturn to the appropriate agency. To get your share of the refund, you'll have

to file an injured spouse claim and probably have to jump through hoops. Youcan avoid the hassle by filing a separate return.

You don't have to be separated to choose married filing separately -You and yourspouse can choose to file separately if you're married as of the last day of the

tax year. Here, you'd report only your own income and claim only your owndeductions and credits. Filing separately may be wise if you want to beresponsible only for your own tax. With a joint return, by comparison, each

spouse is jointly and individually liable for the full amount of the tax due. So,

if your spouse skips town, you'd be left holding the tax bag unless you

qualified as an innocent spouse.

Filing separately might also be the best tax move if one spouse has significant

medical expenses or miscellaneous itemized deductions. Your ability to takethese deductions is tied in to the level of your adjusted gross income orassessable income. For example, certain expenses are deductible only if they

exceed a given percent of adjusted gross income or assessable income ormaximum limited to the amount of assessable income. By filing separately orjointly the assessable income for each spouse is varied.

Remember, though, that you won't qualify for certain credits (such as the

child and dependent care tax credit) and can't take certain deductions if you

file separately. For example, you cannot deduct qualified education loaninterest if you're married, unless you file a joint return.

Head of household status offers certain income tax advantages -Those whoqualify for the head of household filing status get special tax treatment. Not

only are the tax rates lower for head of household filers than for single filersand married filing separately filers, but the standard deduction is larger as

well. However, you'll have to satisfy the following requirements:

1. Generally, you should be unmarried at the end of the year (unlessyou live apart from your spouse and meet certain tests)

2. You must maintain a household for your child, dependent parent,or other qualifying dependent relative

3. The household must be your home and generally must also be themain home of a qualifying relative for more than half of the year


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4. You must provide more than half the cost of maintaining thehousehold

5. You must be a citizen or resident alien for the entire tax year in thecountry of legislation.

Qualifying widow/er with dependent child offers the advantages of a joint return -You may be able to select the qualifying widow/er with dependent child

filing status if your spouse died recently. This status allows you to use joint

tax rates and offers the highest possible standard deduction, the oneapplicable to joint tax returns. To qualify, you must satisfy all of the following

conditions:

1. Your spouse died either last tax year or the tax year before that2.

You qualified to file a joint return with your spouse for the year heor she died

3. You have not remarried before the end of the tax year4. You have a qualifying dependent child5. You provide over half the cost of keeping up a home for yourself

and your qualifying child

As you can see, choosing the correct filing status is not always easy. You

might want to speak with a professional tax preparer or consult the TaxDepartment or Authority Publications for more information


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Chapter 3

Help! I Can't Pay My Tax Liability

Tip 28- When in Trouble Take Action (Dont Ignore the Issue)

You're almost done with your income tax return, and you're already thinking of

ways to spend your refund. Then, the unthinkable happens--instead of a refund, youfind that you owe a large amount of money to the Tax Department or Authority. Or

perhaps you've just received a notice in the mail claiming that you owe a certainamount of money for an incorrect deduction you took two years ago which reduced

your tax liability then. You thought it was tax free at the time. Whatever the reason,

you're now in the unenviable position of owing money to the Tax Department orAuthority-and you don't have the cash. What do you do now?

Don't panic. You have several options. That said; however, don't put your head inthe sand. The Tax Department won't go away, and the amount you owe will only

grow larger if you procrastinate. If you ignore your tax bill entirely, not only will

interest and penalties accrue, but the Tax Department or Authority may go afteryour assets and wages as well. You can avoid all of that unpleasantness by finding away to pay your taxes. Here are some possibilities.

Tip 29-Buy Yourself Time

Perhaps you're between paychecks right now, or maybe you just paid a substantial

car repair bill. For one reason or another, you're suffering from a short-term cash

flow problem. You'll eventually have the cash to pay your tax bill-you just don't have

it right now. If that's your situation, you may want to consider the followingapproach. Pay as much as you can when you file your tax return. This will helpreduce the penalties and interest that you'll be charged.

Next, wait for the Tax Department or authority to send you a bill for the remaining

balance. This should take roughly 45 days in an efficiently tax administered country

or late as 90 days if otherwise. Perhaps by then you'll have enough cash to pay thebill in full. If not, pay as much of this bill as you can (again, reducing penalties and

interest), and wait. In another 45 days (only approximate), you'll get another bill. As

you can see, it takes a while for the Tax Department or Authority to get serious. So,by following this process, you can buy yourself some time.

One problem with this approach, however, is that interest and penalties continue to

accrue on the unpaid balance. So, while you may buy yourself some time, the totalamount that you'll end up paying may be much higher than it would have been ifyou had paid your tax bill in full when due.


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There's another thing to keep in mind-filing an extension will do you no good. Anextension simply extends the time to file your tax return; it doesn't extend the time

to pay your tax. Whatever you do, file your return on time. A timely filed return can

reduce your subsequent penalties and has time-bar implications on the tax audit.

Tip 30- Borrow and Have a Repayment Plan

One of the easiest ways to pay your tax bill may be to borrow the money from a

relative or close friend. Borrow whatever you must to pay the bill in full, and drawup a payment plan to reimburse your benefactor. By paying the bill in full, you'll be

able to avoid Tax Department or Authority penalties and interest. And you may nothave to pay interest to your relative or friend. However, be careful if you borrow

below-market interest rates as rules may trigger certain tax consequences.

If you can't borrow from a relative or friend, consider taking out an unsecured bank

loan or tapping into a home equity line of credit. Although the interest rates may be

higher than interest that a relative or friend may charge, the interest will probablybe less than the interest and penalties owed on the unpaid tax. Find the financial

implications before doing this with the support of your tax professional.

Tip 31-Pay by Credit Card (Some Countries are not geared for this)

Another option is to pay your taxes by credit card provided the Tax Department or

Authority is geared to handle this. Obviously, you'll want to use the card with thelowest interest rate. If you're approaching your credit limit on a given card, you can

split payments between two different credit cards. Contact the Tax Department orAuthority to find out which credit cards are accepted.

Paying by credit card allows you to pay your tax bill on time. You'll avoid both

penalties and interest for late payment of taxes. However, the interest rate that your

credit card company charges may be higher than what the Tax Department orAuthority charges on installment payments or late payments.

Tip 32- Negotiate an Installment Agreement with the Tax Department

An installment agreement is a monthly payment plan with the Tax Department or

Authority. It's the most widely used method for paying a Tax Department or

Authority tax debt. The tax Department or Authority is required to accept thepayment of your tax liability in installments if your total tax liability (not countinginterest, penalties, and other additions) is within an acceptable limit and if you meeta few other requirements.

Your tax liability may be spread out over three years, and payments can be

automatically withdrawn from your bank account or made through payroll


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Chapter 4

Surviving an Tax Department or Authority Audit

Tip 35- Have your Information Ready and Know the Terrain

Even the most honest of taxpayers can be left trembling at the thought of a Tax

Department or Authority audit. Let's face it-it's right up there with public speaking.To survive an audit, you've got to arm yourself with information. You should

understand what the audit process is all about, why your return was audited, whatyour rights and responsibilities are, and how you can appeal the findings.

A Tax Department or Authority audit is an impartial review of your tax return todetermine its accuracy-it's not an accusation of wrongdoing. However, you must

demonstrate to the Tax Department or Authority that you reported all of yourincome and were entitled to any credits, deductions, and exemptions in question.

The Tax Department or Authority must complete an audit within the stipulated time

from when the tax return is filed, unless tax fraud or a substantial underreporting ofincome is involved or suspected.

Tip 36- Know the Triggers of an Audit

Several factors can lead the Tax Department or Authority to single out your returnfor an audit. For instance, taxpayers who are self-employed receive much of their

income in tips, or run cash-intensive businesses face a greater likelihood of audits.The Tax Department or Authority also pays more attention to professionals such as

doctors, lawyers, and accountants (who often run their own businesses and do their

own bookkeeping). In addition, if youre itemized deductions in several major

categories-medical and dental expenses, taxes, charitable contributions, and

miscellaneous-are greater than average, you'll have an increased chance of beingaudited. Other red flags may include:

1. A return that is missing required schedules2. A return signed by a preparer associated with problems in the past3. A return signed by a preparer who is unqualified to do it4. A return reporting income above a particular limit5. A return showing a substantial reduction in tax due to changed tax status

Make sure the red flags mentioned above are avoided as far as possible.

Tip 37- Types of Audits and What to Do

If you are to be audited, the Tax Department or Authority will inform you by letter.There are three types of audits:


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A correspondence audit: This is for minor mistakes and requires only thatyou mail certain information to the Tax Department or Authority. Forexample, maybe you forgot to attach a schedule to your income tax return.

The matter will be closed if the tax department or authority is satisfied with

your paperwork.

An office audit: Here, you'd typically bring your tax-related records to a TaxDepartment or Authority office for examination. For example, if you claimed

an unusually high deduction for medical expenses, the tax department or

authority may want to see your medical bills and canceled checks, among

other things.

A field audit: Here, the auditor generally visits your home or business toverify the accuracy of your tax return. It may be possible for the auditor tovisit the office of your representative, instead.

Tip 38- Know and Exercise Your Rights during an Audit

You have several rights when you're involved in an audit. These include:

The right to an explanation of the audit process The right to representation by an attorney, Chartered Accountant or

Certified Public Accountants or an agent appointable under the tax

legislation

The right to claim additional deductions that you didn't originally claimon your tax return

The right to request an opinion from the Tax Department or Authority'snational office on specific technical issues that arise during the audit

Follow the legislation of the country to seek redress.

Tip 39- Some Crucial Things to Know and Do

Consider the following when you are audited:

Request a postponement (whenever you need it) to gather your recordsand put them in order

Be sure to read the Tax Department or Authority Publications whichoutline Taxpayers' Rights before your audit

Before your initial interview with the tax department or authority agent,meet with your representative (if any) to discuss strategies and expectedresults

Bring to the audit only the documents that are requested in the taxdepartment or authority notice


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Be thoroughly prepared--if your records clearly substantiate the itemsclaimed on your return, the agent won't waste time conducting a more in-depth audit

Be professional and courteous (and expect the same treatment in return) Do not volunteer information to the tax department or authority agent; if

you have a representative, he or she should respond to the agent'squestions

Don't lie Keep detailed records of any materials that you submit to the agent and of

any questions asked by the agent

Ask to speak to the auditor's supervisor if you think that the agent istreating you unfairly

When you get the examination report, call the auditor if you don'tunderstand or agree with it

If you don't agree about the tax liability, meet to see if a compromise canbe reached

You can either agree or disagree with the auditor's findings. If you agree, you'll

complete some paperwork and pay what's owed. If you disagree with the auditor,

the issues in question can be reviewed informally with the auditor's supervisor. Or,you can appeal to the Tax Department or Authority. Follow the legislation of the

country to seek redress.


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Chapter 5

Tax Benefits of Home Ownership

Tip 40- The Benefits and Limits of Home Ownership

In tax lingo, your principal residence is the place where you legally reside. It's

typically the place where you spend most of your time, but several other factors arealso relevant in determining your principal residence. Many of the tax benefits

associated with home ownership apply mainly to your principal residence-differentrules apply to second homes and investment properties. Here's what you need to

know to make owning a home really pay off at tax time.

One of the most important tax advantages of home ownership is the deduction of

mortgage interest. If you itemize deductions on the schedule of your income tax

return, you can generally deduct the qualified residence interest that you pay oncertain home mortgages taken on your principal residence. (This also applies to

second homes.) That is, you may be able to deduct the interest you've paid on a

mortgage to buy, build, or improve your home, provided that the loan is secured byyour home. Your ability to deduct interest depends on several factors.

Up to a certain limit of acquisition mortgage debt qualifies for interest deduction. Ifyour mortgage loan exceeds this limit some of the interest that you pay on the loan

will not be deductible.

Although this deduction also applies to certain home equity loans secured by your

home, the rules are different. Home equity debt involves a loan secured by yourmain or second home that exceeds the outstanding mortgages on the property.

The interest that you pay on a qualifying home equity loan is generally deductibleregardless of how you use the loan proceeds.

Tip 41- The Pitfalls of Improvements and Repairs

Home improvements and repairs are generally nondeductible. Improvements,though, can increase the tax basis of your home (which in turn can lower your taxbite when you sell your home). Improvements add value to your home, prolong its

life, or adapt it to a new use. For example, the installation of a deck, a built-in

swimming pool, or a second bathroom would be considered an improvement. Incontrast, a repair simply keeps your home in good operating condition. Regularrepair and maintenance (e.g., repainting your house and fixing your gutters) are not

considered improvements and are not included in the tax basis of your home.

However, if repairs are performed as part of an extensive remodeling of your home,the entire job may be considered an improvement.


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If you meet the requirements, you can exclude from income tax up to a limit of anycapital gain that result from the sale of your principal residence, regardless of your

age. In general, an individual, or either spouse in a married couple, can use this

exclusion only once every two years. To qualify for the exclusion, you must haveowned and used the home as your principal residence for specified period of time.

What if you fail to meet the time limit rule? Or what if you used the capital gainexclusion within the specified period with respect to a different principal residence?

You may still be able to exclude part of your gain if your home sale was due to a

change in place of employment, health reasons, or certain other unforeseencircumstances. In such a case, exclusion of the gain may be prorated.

Additionally, special rules may apply in the following cases:

If your principal residence contained a home office or was otherwise usedpartially for business purposes

If you sell vacant land adjacent to your principal residence If your principal residence is owned by a trust If you rented part of your principal residence to tenants If you owned your principal residence jointly with an unmarried taxpayer

Consult a tax professional for details.


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Other ways of shifting income include hiring a family member for the familybusiness and creating a family limited partnership. Investigate all of your optionsbefore making a decision.

Tip 46-Take All Deductions Possible at the Right Time

Lowering your income tax liability through deductions is the goal of deductionplanning. You should take all deductions to which you are entitled, and time them in

the most efficient manner.

As a starting point, you'll have to decide whether to itemize your deductions or take

the standard deduction. Generally, you'll choose whichever method lowers yourtaxes the most. If you itemize, be aware that some (or all) of your deductions may be

disallowed if your adjusted gross income (AGI) or total statutory income reaches a

certain threshold figure. If you expect that your AGI might limit your itemizeddeductions, try to lower your AGI. To lower your AGI for the year, you can defer part

of your income to next year, buy investments that generate tax-exempt income, andcontribute as much as you can to qualified retirement plans.

Because you can sometimes control whether a deductible expense falls into the

current tax year or the next, you may have some control over the timing of your

deduction. If you're in a higher income tax bracket this year than you expect to be in

next year, you'll want to accelerate your deductions into the current year. You canaccelerate deductions by paying deductible expenses and making charitablecontributions this year instead of waiting until next.

Tip 47- The Basics of Investment Tax Planning

Investment tax planning seeks to lower your overall income tax burden through

wise investment choices. Several strategies exist. These include investing in tax-

exempt securities and timing the sale of capital assets properly.

Although income is usually taxable, several investments can generate tax-exempt

income. For example, the interest on certain treasury bills and bonds may be exemptfrom income taxes. When comparing taxable and tax-exempt investments, you'llwant to focus on those vehicles that maximize your after-tax return.

In most cases, long-term capital gains tax rates are lower than ordinary incomerates. You may be able to time the sale of your capital assets (such as stock) so as to

minimize your income tax liability. For example, if you expect to be in a lower

income tax bracket next year, wait until then to sell your stock. You may want toaccelerate income into this year, though, if you have capital losses this year and

need to offset them with capital gains. Note that capital gains increase your AGI,


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which in turn may affect the amount of your itemized deductions and personalexemption.

Tip 48-Year End Planning

Year-end tax planning, as you might expect, typically takes place in the last minute.

It involves timing your income so that it will be taxed at a lower rate and claiming

deductible expenses in years when you are in a higher income tax bracket. Thisusually means postponing income to a later year and accelerating deductions into

the current year. For example, assume it's December and you're entitled to a year-end bonus. However, you're in a higher tax bracket this year than you expect to be in

next year. The solution? Ask your employer to pay it to you in January of next year,

rather than now (assuming that the tax year ends in December). This will allow youto postpone the taxable income. Also, if you have major expenses or work scheduled

for the beginning of next year, reschedule for December to take advantage of the

deduction this year. If you expect to be in a higher tax bracket next year, however,you should accelerate your income into this year and defer your deductions untilnext year.


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Chapter 7

Tax Planning for the Self-Employed

Tip 49-Business and Self-Employment Expenses Must be Documented

Self employment expenses must be documented. There are instances where the taxcourts have disallowed what might otherwise have been legitimate expenses

because of poor or nonexistent documentation. A lack of proof to support thetaxpayer's argument in the event of a dispute with the Tax Department or Authority

could also lead to the imposition of fines or penalties

Tip 50- Document Work Content and Salaries Paid to Family Members

Salaries paid to a family member or spouse may be allowed provided that theindividual becomes eligible to pension contributions

You should be especially vigilant about documenting the work carried out by family

members in order to help prove the compensation they received was equitable.

Also consider salary vs. dividends-when determining the optimal mix of salary anddividends ensure that personal tax credits are fully used. Maintain desirable levels

of salary for purposes of pension contributions.

Tip 51- Methods to Reduce Self-Employed Business Corporate Taxes

Accrued bonuses-you may also want to consider paying out active corporate income

that would otherwise attract high corporate rates as bonuses. Note however that

accrued bonuses must be paid within a specified time after the fiscal year-end.

Related issues affecting business income and dividends- establishing a management

company or professional corporation because salaries paid by management

companies are effectively subject to value added tax exempt professional shouldconsider directly employing administrative staff.

Business partnerships-make sure that any partnership agreements are in writing

and can be accessed. Clearly in the event a future dispute should arise that needs tobe resolved in the courts this becomes essential.

Consider introducing family members as shareholders so they may participate in

dividend income and possibly directors' fees even if no direct involvement in

operations were present to justify salaries.


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Capital dividends-you may still be eligible to receive dividends even after havingdisposed of your shares provided you were the registered shareholder on the date

the dividend was declared.

Tip 52-Understand and Comply with Your Tax Responsibilities

Self-employment the opportunity to be your own boss, to come and go as you

please, and oh yes, to establish a lifelong bond with your accountant. If you're self-

employed, you'll need to pay your own taxes and take charge of your ownretirement plan, among other things. Here are some planning tips.

As a starting point, make sure that you understand (and comply with) your tax

responsibilities. You must pay this tax if you have more than a minimal amount of

self-employment income. If you file as a sole proprietor, independent contractor, orstatutory nonemployee, the net profit listed on your schedule is self-employmentincome and must be included on return.

Tip 53- Making Your Tax Payments on Time

Employees generally have income tax (PAYE), Social Security tax (in the form of EPF

and ETF), and Medicare tax withheld from their paychecks. The types of taxes

withheld can vary between countries. But if you're self-employed, it's likely that no

one is withholding taxes from your income. As a result, you'll need to make

quarterly estimated tax payments on your own (using the Tax Department or

Authority specified forms) to cover your income tax and self-employment taxliability. You'll probably have to make estimated tax payments, as well. If you don't

make estimated tax payments, you may be subject to penalties, interest, and a big

tax bill at the end of the year. For more information about estimated tax familiarizewith the Tax Department or Authority publications.

If you have employees, you'll have additional periodic tax responsibilities. You'll

have to pay employment taxes and report certain information. Stay on top of your

responsibilities and see the Tax Department or Authority publications for details orelse you might end up paying the taxes of your employees (which you need to

deduct from their salaries and wages and remit it the Tax Department or Authority).

Tip 54- Some Methods of Reducing the Self- Employment Income

Hiring a family member to work for your business can create tax savings for you; in

effect, you shift business income to your relative. Your business can take a deductionfor reasonable compensation paid to an employee, which in turn reduces theamount of taxable business income that flows through to you. Be aware, though, that

the tax department or authority can question compensation paid to a family

member if the amount doesn't seem reasonable, considering the services actually

performed. Also, when hiring a family member who's a minor, be sure that yourbusiness complies with child labor laws.


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As a business owner, you're responsible for paying Social Security and Medicaretaxes or Employment Provident Fund (EPF) and Employment Trust Fund (ETF) on

wages paid to your employees. The payment of these taxes will be a deductible

business expense for tax purposes. As is the case with wages paid to all employees,wages paid to family members are subject to withholding of income andemployment taxes, as well as certain taxes.

Tip 55- Choose the Best Retirement Plans with Tax Benefits

Because you're self-employed, you'll need to take care of your own retirement

needs. You can do this by establishing an employer-sponsored retirement plan,

which can provide you with a number of tax and nontax benefits. With such a plan,

your business may be allowed an immediate income tax deduction for funding theplan. You can also generally place pretax income dollars into a retirement account to

grow tax deferred until withdrawal.

The type of retirement plan that your business should establish depends on your

specific circumstances. Explore all of your options and consider the complexity of

each plan. And bear in mind that if your business has employees, you may have to

provide coverage for them as well. For more information about your retirement

plan options, consult a tax professional or see Tax Department or Authoritypublications.

Tip 56-Tax Planning Issues with Your Retirement Savings Plans

Contribute to your retirement plans early in the year. If for example youcontribute DOLLARS 16,500 at the beginning of the year rather than the end

over the 25 year assuming an 8% rate of return you would have an extra

DOLLARS 96,500 in your retirement account.

Individuals with low earned income that precludes their owing any tax shouldstill consider filing the tax return in order to create retirement contribution

room for future use.

Tip 57- Credit Proof Your Retirement Plan

In the event of bankruptcy creditors' are able to seize funds from most retirement

plans held at financial institutions. However retirement plans through an insurancepolicy that is properly structured in terms of tax benefits are generally exempt from

creditors under the bankruptcy acts. Therefore most individuals particularly if they

are self-employed and face a potentially greater risk of bankruptcy should consider


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credit proofing at least a portion of their retirement plan portfolio in this fashion.Your accountants could help you to set this up.

Tip 58- Plan the Timing of Inflows and Outflows to Your Retirement Plans

You do not have to deduct retirement contributions the year in which it is made.Instead you can carry it forward for deduction in the future when you have

income placing you in a higher tax bracket. Be sure you have used all personal

tax credits before deducting your retirement contribu

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