An English Course in Practical Taxation. Учебно-практическое пособие

Block 13. Deductions

2.It is very important to know about the concept of legislative grace to determine items that qualify for deduction

3.The rule is that on item may be deducted unless the tax law specifically permits it.

4.An expense is a current period expenditure that is incurred to earn income.

5.Trade or business expenses and income-producing expenses must be high in amount to be deductible

6.Allowable personal expenses are deductible as itemized deductions and are not subject to limitations

7.A loss occurs when an asset is disposed of for a selling price that is less than its tax cost.

8.The second type of loss is an annual lo

9.The treatment of the annual loss doesn’t depend on the activity in which the loss is incurred

10.The deduction for individual exemptions is reduced for lowincome taxpayers.

Ex. 4. Answer the questions.

1.What are deductions?

2.What gives us a basic rule to follow to determine items that qualify for deduction?

3.How are deductions characterized?

4.What does the term loss refer to?

5.When does a loss occur?

6.How are losses characterized?

7.What does the treatment of the annual loss depend on?

8.Why are the exemption amounts indexed?

Ex. 5. Translate the following sentences into English.

1.Налоговый вычет представляет собой ту сумму, которую налоговый закон позволяет вычесть из валового дохода при уплате налога.

2.Налоговый вычет характеризуется как издержки, чистые убытки, освобождение от ответственности и льготы.

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3.Расход — это все те затраты, которые понёс налогопла- тельщик в текущим периоде, чтобы заработать доход.

4.Ежегодная потеря следует из избытка допустимого нало- гового вычета в течение налогового года по доходу, о кото- ром сообщают, в течение года.

5.Минимальное количество дохода, полученного за отчёт- ный период, не попадает под обложением налогом и спи- сывается как освобождение от уплаты налога.

6.В отношение подоходного налога для определённых кате- горий налогоплательщиков, налоговым законодательством предусмотрено предоставление льгот.

7.С учётом инфляции, число предоставляемых льгот увели- чивается с каждым годом.

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tional planning technique of deferring income and accelerating deductions may not always be the best tax plan. The traditional technique considers only the time value of money savings that can be obtained from delaying tax payments on income or receiving tax savings from deductions sooner. Although the time value of money must always be considered, changes in marginal tax rates from one year to the next can have effects that offset the time value of money. Thus in many cases, changes in both the marginal tax rate and the time value of money must be considered when developing a tax plan. The mechanics of tax planning demonstrate basic techniques that can be used to help make tax-planning decisions. The planning discussion concludes by pointing out that tax avoidance is acceptable but tax evasion is not.

Mechanics of Tax Planning

The mechanics of tax planning focus on the issues of timing and income shifting. The timing question to be answered is when income and deductions should be claimed to save the most real tax. To make decisions involving timing, it is necessary to compare the tax effects of changes in marginal tax rates and the time value of money. To make the optimal choice among different alternatives, the calculations must be done to determine the real after-tax cost of each alternative. Income shifting involves moving income among related taxpayers to achieve the lowest marginal taxes (and lowest total tax) on the income of the related taxpayers. Shifting is commonly done by transferring income-producing property among family members and by using corporations that taxpayers control to shift income into the lowest marginal tax rates.

Timing Income and Deductions. A taxpayer's marginal tax rate and the time value of money must be considered in tax planning. The traditional technique of deferring income and accelerating deductions relies solely on the time value of money savings from delaying the tax payment or receiving the tax deduction savings earlier. For example, a taxpayer who expects to be in a 28percent marginal tax bracket for the next several years might be indifferent about reporting $1,000 in extra income in 2000 or 2001.

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Block 14. Tax planning

Regardless of which year the income is reported, the taxpayer pays $280 in tax and keeps $720 ($1,000 — $280) in after-tax income. When the present value of the tax payment is considered, it becomes clear that choice of years does make a difference. If the taxpayer's applicable interest rate is 10 percent and the marginal rate is expected to remain the same, deferring payment of the tax until 2001 results in an interest-free loan. The present value of the tax savings is $25:

If the marginal rate is expected to decrease to 15 percent in 2001, the taxpayer has a greater incentive to defer the income. By deferring the income to 2001, the taxpayer receives the benefit of an interest-free loan for one year plus the benefit of the lower marginal tax rate. Deferring the income to 2001 would result in a real tax benefit of $144:

If the taxpayer expects the marginal tax rate to increase to 31 percent next year, the income should be reported in 2000. Deferring the income to 2001 would have a real tax cost of $2:

The same approach can be used to determine the best timing for a deduction. However, keep in mind that deductions are the

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opposite of income—they reduce taxes paid. Therefore, the optimal choice for deductions is to maximize the real after-tax reduction in taxes paid. In many situations, it may be necessary to compare the offsetting effects of income and deduction items.

Problem-solving 27. Ann Corporation owes a $2,000 expense that may be paid and deducted on the cash basis of accounting in either 2000 or 2001. The applicable interest rate is 10%. In which year should Ann Corporation take the deduction if its 2000 marginal tax rate is 25%?

Discussion: The optimal year for taking the deduction depends on Ann Corporation's expected marginal tax rate in 2001.

Ex. 1. Find the equivalents for the following words and expressions in the text.

Перенос поступлений на счета будущего периода; измене- ние дохода; отсрочка налоговых выплат; доход после выплаты налогов; подобныйподход; применимаяпроцентнаяставка

Ex. 2. Complete the sentences using the appropriate words.

a — time value b — deferring

c— after-tax wealth

d— evasion

e— bracket

f— shifting

1.The objective of tax planning is to maximize ….

2.The traditional technique considers only the … of money savings.

3.The planning discussion concludes by pointing out that tax avoidance is acceptable but tax … is not.

4.The mechanics of tax planning focus on the issues of timing and income ….

5.A taxpayer who expects to be in a 28-percent marginal tax … for the next several years might be indifferent about reporting $1,000 in extra income in 2000 or 2001.

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Block 14. Tax planning

6.By … the income to 2001, the taxpayer receives the benefit of an interest-free loan for one year plus the benefit of the lower marginal tax rate.

Ex. 3. Are the statements true (+) or false (–)? Correct the false statements.

1.he objective of tax planning is to minimize after-tax wealth.

2.he traditional planning technique of deferring income and accelerating deductions is always the best tax plan.

3.hanges in both the marginal tax rate and the time value of money must be considered when developing a tax plan.

4.he planning discussion concludes by pointing out that tax evasion is acceptable but tax avoidance is not.

5.he mechanics of tax planning focus on the issues of timing and income shifting.

6.hifting is never done by transferring income-producing property among family members.

7.taxpayer's marginal tax rate and the time value of money must be considered in tax planning.

8.hen the present value of the tax payment is considered, it becomes clear that choice of years doesn’t make a difference.

9.n many situations, it may be necessary to compare the offsetting effects of income and deduction items.

Ex. 4. Answer the questions.

1.What is the objective of tax planning?

2.What can lead to excessive tax payments?

3.Why may the traditional planning technique of deferring income and accelerating deductions not be the best tax plan?

4.What changes must be considered when developing a tax plan?

5.What is the difference between tax avoidance and tax evasion?

6.How is shifting commonly done?

7.What value of money must be considered in tax planning?

8.How can the best timing for a deduction be determined?

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states of the former East Germany, is still in effect. The corporate tax rate, which was thought to discourage investment in Germany, will decrease from 30% — 40% to only 25%.

The most stimulating news for corporations though is the exemption from capital gains taxes when selling holdings in industrial companies. Large banks and insurance companies have been holding vast quantities of such shares for decades, but have been reluctant to sell them due to the significant capital gain liabilities that would have been assessed. The reform, which applies to shares held longer than a year, is expected to free up considerable amounts of capital for young, promising enterprises and business start-ups.

Individual income Taxes

In Germany you can be subject to tax if you either have German source of income or if you are a German resident. However, there are various exemption rules that must be considered in every single case. The German tax system is similar to the structures in other western countries. You pay income taxes throughout the year, usually with an employer deducting tax from each paycheck. Adjustments would then be made at the end of the year for possible under or overpayments.

Deductions from compensation are also made for three social programs: retirement, unemployment and health insurance. Payments for these programs are borne equally by the employer and the employee. The employer's share of contributions is not considered as taxable income to the employee and the employee's portion is tax deductible up to a certain limit.

If an individual is subject to German tax, generally most sources of income are then taxable. The wage tax, which alone accounts for a third of the German government's revenue, is withheld at source from compensation. Income from other sources (e. g. self-employment, fees for services, rent collections, investments and the like) are covered by the income tax.

The wage tax differs from the income tax only by the method of collection. The wage tax is collected at source and paid directly to the tax office by the employer while the individual must pay the

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