Income Tax Planning: Reducing What You Owe without Breaking the Law

An individual taxpayer in a high marginal bracket can reduce overall tax liability by shifting income to lower-bracket family members or related entities through legitimate business arrangements, by accelerating deductible expenses into the current year, and by deferring the recognition of taxable income into future years, and business tax counsel advising on income tax planning must evaluate whether the proposed income allocation structures have adequate economic substance to withstand IRS scrutiny under the substance over form doctrine.

The Internal Revenue Code contains numerous credits and incentives for specific activities, including the research and experimentation credit, the work opportunity tax credit, and various energy-related investment credits, and tax advantaged investment counsel reviewing a company's eligibility for available credits must evaluate whether the company's activities satisfy the specific statutory requirements for each credit.

An individual who spends significant time in multiple countries may be treated as a tax resident in more than one jurisdiction simultaneously, and FBAR and FATCA compliance counsel advising on an individual's international tax position must evaluate whether the individual qualifies as a US person subject to worldwide taxation and whether the individual satisfies the physical presence or substantial presence tests that trigger tax residency in the foreign jurisdiction.

A US taxpayer who receives income from a foreign country may be subject to tax in both the US and the foreign jurisdiction, and the applicable tax treaty typically prevents double taxation by exempting the income from US tax or allowing a foreign tax credit, and international tax compliance counsel advising on the tax treaty position must evaluate whether the US-source or foreign-source characterization of the income is consistent with the treaty's definitions.

An executive who holds incentive stock options has significant flexibility in timing the exercise and sale of the underlying shares, and the interaction between regular income tax and the alternative minimum tax creates opportunities to minimize the total tax cost that require careful analysis, and gift tax planning and income tax counsel advising on an executive compensation strategy must evaluate whether the executive's existing AMT exposure creates a risk that an option exercise in the current year will trigger significant additional tax.

A business owner who transfers ownership of a closely held business to family members or key employees must address the income tax consequences of the transfer, including the recognition of gain on the sale of appreciated assets and the potential recharacterization of sale proceeds as ordinary income rather than capital gain, and estate tax and income tax counsel advising on a succession transaction must evaluate whether the transaction structure allows the business owner to recognize gain at long-term capital gain rates.

An IRS audit that challenges a taxpayer's income tax planning position typically begins with a request for documents and information that support the deduction, credit, or characterization at issue, and IRS audit defense counsel representing a taxpayer in an audit must evaluate whether the documentation supporting the challenged position is complete and consistent with the taxpayer's reported treatment.

A taxpayer who disagrees with the IRS's determination of additional tax due after the audit process must decide whether to pay the disputed amount and file a refund claim or to contest the IRS's determination in Tax Court without prepaying the disputed tax, and tax audits and adjustments counsel advising on the litigation decision must evaluate whether the legal and factual issues in dispute are susceptible to favorable resolution in Tax Court.