Anyone may so arrange his affairs that his taxes shall be so low as possible;

Transcription

1 Anyone may so arrange his affairs that his taxes shall be so low as possible; he is not bound to choose the pattern which will best pay the treasury; there is not even a patriotic duty to increase one s taxes. Judge Learned Hand, Circuit Judge U.S. Court of Appeals Inside This Guide Book Diverting Some Income to a Low-Tax Bracket Relative Deferring Part of Your Income Retirement Planning and Tax Savings Satisfying Savings Supplement Converting to Favorably Taxed Income... 5 Making the Best of Capital Gains Converting... and Helping Deductions Are Substantial Maximizing Your Deductions One Deduction That s Easy to Boost Plan Your Gift Carefully Planning for Alternative Minimum Tax Long-Range Tax Planning Year-End Planning Investments at Year s End A Final Word Notes for Tax Advisers

2 In today s economy, it is important that you plan your financial program carefully to take advantage of all of the income tax saving measures to which you are entitled. High income tax and capital gains tax rates make it too expensive to ignore financial planning. Congress has provided the means for minimizing your income tax liability. Savings may result from restructuring your business affairs, investments and compensation arrangements. This booklet will help acquaint you with the tax deductions, exemptions and exclusions that are available to you for reducing your income taxes. Why is prudent planning so important? A $1,000 tax savings obtained through a carefully prepared tax program is worth nearly $1,389 to you in added income if you are in a 28% tax bracket. Such significant savings are available to you now, and may help you secure future financial security for you and your family. Tax planning also may make it possible for you to benefit our work in a way that otherwise would not be possible. DIVERTING SOME INCOME TO A LOW-TAX BRACKET RELATIVE One way to minimize income taxes is to divert part of your income to another taxpayer who is in a lower income tax bracket. For example, suppose you own securities that produce an annual income of $10,000. In a 33% tax bracket, you might keep only $6,700 of this income, but if you transfer ownership to your children, the income will be taxed in their lower tax brackets, if they are 19 or older (24 if a full-time student). Children subject to the kiddie tax will have investment income in excess of certain levels taxed at their parents top rate. 1 For these children, it may make sense to give them assets that defer income until they are older. For example, a parent might give a young child U.S. savings bonds or growth stock securities that pay low dividends but are expected to increase in value. Typically, no income would have to be reported unless these investments are liquidated after the child turns 19 or leaves college. Gifts of income-producing property also can make sense when providing for an aged parent or other relative who may be in a lower tax bracket than you are. You also might consider a plan that not only diverts income but creates substantial deductions and helps provide for our future a charitable remainder trust. 2 Example: For years, Emily has been sending $500 a month to her 80-year-old 2

3 mother, which represents after-tax dollars for Emily. She would be better off giving her mother stocks that produce the same amount of income. Her mother might pay little or no tax on the dividends, and Emily would reduce her own taxes by getting rid of some taxable income. Emily could simply give her mother the securities in the expectation that her mother would will them back to her. But Emily also wants to provide a significant gift for our future development. Her advisers suggest that Emily transfer stock worth $100,000 to a charitable remainder unitrust that will pay her mother 6% of the annual value of the trust. After her mother s death, trust income payments will continue for Emily s life. Only after Emily s death will we receive any benefit. If Emily is 60 when she sets up the trust, she will receive a deduction of about $29, She helps her mother and reduces her taxes two ways through income shifting and through a substantial charitable deduction. DEFERRING PART OF YOUR INCOME Another method you can use to minimize income taxes is to defer part of your income until a year when you are in a lower tax bracket, such as after retirement. In effect, this is what you do when you participate in a qualified retirement plan. By deferring part of your income, you also defer paying the tax on that portion of your income. Income deferral is another popular tax planning technique. People who are in the 35% or 39.6% tax bracket during their working years may drop to the 28% or 25% bracket after they retire. Furthermore, deferral of income can permit the tax-free accumulation of wealth which means your savings can grow faster. A simple example is U.S. savings bonds, in which the interest can accumulate tax free until you cash the bonds. Interest in a savings account, by comparison, must be reported (and taxed) every year. RETIREMENT PLANNING AND TAX SAVINGS It is possible to save for retirement using any one of the following taxfavored arrangements: (1) Qualified company pension, annuity or profit-sharing plans for employees and stockholders. 4 (2) Simplified Employee Pensions generally permitting self-employed persons and their employees to make tax-deductible 3

4 contributions of up to 25% of their incomes or $53,000, whichever is less. (3) Salary Reduction SEPs, in which the employer can contribute to the employee s IRA and deduct up to $18,000 (adjusted for inflation). (4) Section 401(k) plans, in which employees can defer $18,000 (adjusted for inflation), often matched in part by employer contributions. Workers age 50 and older may make additional $6,000 catch-up contributions. (5) Individual Retirement Accounts, in which employed and self-employed persons and nonworking spouses may place funds, up to $5,500 a year. Earnings on these savings accumulate tax deferred. Additionally, income tax deductions are available for workers not covered by employer retirement plans. The deduction also is available for taxpayers within certain income ranges, even if they are covered by employer retirement plans. Workers age 50 and older may make catch-up contributions of an additional $1,000 per year. (6) Roth IRAs, to which employed persons can contribute up to $5,500 annually. Contributions are not deductible, but earnings and qualified withdrawals are tax free. 5 Roth 401(k) plans and Roth 403(b) annuities are also available. SATISFYING SAVINGS SUPPLEMENT Individuals are generally limited on the amounts that they can contribute to and deduct through retirement savings plans. With the charitable contribution deduction, however, there are few limits which is where the charitable retirement unitrust comes in. It s possible to save for retirement in a way that includes income tax deductions, tax-free buildup of your savings and eventual benefit for our future. Here s how it works: You transfer property, preferably during your years of high income, to a charitable remainder unitrust from which you (or you and another designated beneficiary) receive income for life, with the property eventually coming to us. You elect a 5% or 6% payout, which yields the largest deduction, minimizes early payments and permits maximum growth of principal for retirement. The trust is invested for high capital growth. Example: Mr. King, 45, transfers assets worth $100,000 to a unitrust that will pay him the lesser of the trust s net income or 6% annually. In the year he sets up the trust, Mr. King can deduct a charitable contribution of about $16,669. The trustee invests entirely in growth stock that is expected to appreciate by the 9% historic stock average each year but provide minimal payments to Mr. King until he retires at age 70. By then, the trust will have 4

5 grown to $862,300, whereupon it will flip to become a standard unitrust paying 6% of $862, Mr. King will enjoy retirement income of nearly $52,000 a year that will be part tax free, part capital gain. Note: If Mr. King wishes, he could suggest that the trustee sell some growth stock in the year he turns 69. If the unitrust has a makeup provision and the trust document has defined capital gains as income, the donor can receive a significant one-time payment that makes up for part or all deficiencies from the 6% payout amount in prior years. Mr. King also might consider adding more each year to his retirement unitrust $25,000, for example and receive additional deductions and even more income at retirement. CONVERTING TO FAVORABLY TAXED INCOME Americans in high tax brackets historically have sought ways to convert some of their income to a form that would either be tax free or taxed at a low rate. Dividends, for example, are taxed at 20% for taxpayers in the 39.6% bracket, 15% for taxpayers in the 35%, 33%, 28% and 25% brackets and zero for taxpayers in the 15% and 10% brackets. Executives might prefer to receive nontaxable fringe benefits from their company rather than a big raise. Many investors choose to convert from bonds with taxable interest to taxexempt municipal bonds, which generally are free of federal tax. For example, 4% in tax-exempt interest can be worth 6.2% of taxable interest if you are in a 35% tax bracket. In a 39.6% bracket, 4% in taxexempt interest is worth 6.6%. It s easy to compute this value. If you are in the 28% bracket, simply divide the interest rate on the bonds by.72. Divide by.67 for the 33% bracket,.65 for the 35% bracket and.604 for the 39.6% bracket. Profits on the sale of investment assets may be eligible for low capital gains tax rates. The tax code makes a distinction between long-term and short-term capital gains. Capital gains on assets held more than 12 months are taxed at a maximum rate of 20% for taxpayers in the 39.6% bracket, 15% for taxpayers in the 35%, 33%, 28% and 25% brackets and zero for taxpayers in the 15% and 10% brackets. Taxpayers with modified adjusted gross income over $200,000 (singles) or $250,000 (couples) are also subject to a 3.8% tax on net investment income, which includes interest, dividends and capital gains. 7 Property held one year or less (short-term gain) is taxed as ordinary income, up to 39.6%. Long-term gains continue to have importance in the area of charitable contributions. Donors may still deduct their paper profit when they give appreciated securities to us if the property has been held long term (more than one year). 5

6 MAKING THE BEST OF CAPITAL GAINS For those interested in providing for our future, capital gains and investment income taxes can be avoided completely through charitable remainder trusts that pay donors income for life, with eventual benefit to our programs. Suppose Michael, age 65, owns growth stock worth $100,000 that he paid $20,000 for several years ago. He wants to reinvest in something that pays him a good income. If he sells the stock, he will owe capital gains tax of $12,000 (15% x $80,000), plus investment income tax of $3,040 (3.8% x $80,000), leaving only $84,960 to reinvest. But if he transfers the stock to a charitable remainder unitrust that pays a 6% return, he avoids income depletion caused by capital gains and investment taxes. He would receive an income tax charitable deduction of about $38,937, saving him $12,849 in the 33% tax bracket. The unitrust washes away his capital gain and net investment tax, increases his income and saves him taxes in the bargain. 8 CONVERTING... AND HELPING Jane has $100,000 in certificates of deposit that are nearing maturity. They pay her 2% annually. She is in a 35% tax bracket. Jane wants to protect more of her income from tax and also would like to do something to assist our work. After the CDs mature, Jane talks to her advisers and decides to use the proceeds to create a charitable remainder unitrust that will pay her 5% annually for the rest of her life. The trustee purchases investments producing primarily capital gains and dividend income. After her death we will receive whatever principal remains in the trust. Result? Jane has successfully switched from an investment that is 100% taxable to an income that is favorably taxed. 9 Furthermore, assuming Jane is 72 when she establishes the trust, she receives a charitable contribution deduction of more than $55,000. DEDUCTIONS ARE SUBSTANTIAL If you established a unitrust (like Michael) or an annuity trust (like Jane), how much could you deduct? The tables on the following page give approximate deductions. 10 Deductions vary monthly; please call us if you would like specific figures, or deductions for two-life arrangements. 6

7 Representative Tax Deductions from Unitrust Funded with $100,000 Trust for Life of a Single Beneficiary 5% Payout 6% Payout 7% Payout 8% Payout Age of to to to to Beneficiary Beneficiary Beneficiary Beneficiary Beneficiary 50 $26,331 $20,949 $16,893 $13, ,854 26,147 21,693 18, ,066 32,168 27,410 23, ,858 38,937 34,005 29, ,289 46,562 41,641 37, ,109 54,810 50,127 45, ,743 63,059 58,811 54,954 Gift of $100,000 to Annuity Trust for Life of Beneficiary (Fixed Amount) Approximate Deduction if Beneficiary Receives: Age of $5,000 $5,500 Beneficiary Annually Annually Annually Annually 75 $55,095 $51,950 $50,604 $47, ,568 62,559 61,024 58, ,897 71,681 70,187 68, ,831 79,128 77,814 77,040 Trust for Joint Lives of Two Income Beneficiaries Ages Deduction if Beneficiaries Receive: of Both 5% 6% 7% 8% Beneficiaries Annually Annually Annually Annually 60/60 $27,394 $21,414 $16,816 $13,274 65/65 33,724 27,424 22,383 18,342 70/70 41,040 34,638 29,318 24,892 75/75 49,171 42,943 37,582 32,966 80/80 57,642 51,869 46,740 42,184 7

8 Minimizing Your Income Taxes MAXIMIZING YOUR DEDUCTIONS Most taxpayers know they can deduct extraordinary medical expenses.11 Many, however, don t appreciate the broad scope of the term medical expense. For example, the cost of transportation primarily for medical care is tax deductible. That means you can deduct the cost of driving to and from your doctor s office. The cost of medically prescribed foods is deductible if they are not substitutes for normal foods.12 If you do volunteer work for a charity or educational institution, your unreimbursed out-of-pocket expenses are deductible including costs of transportation, special uniforms and the like.13 Moving expenses necessitated by a change in your employment location are deductible from gross income. Amounts paid by your employer do not need to be included in gross income. Because consumer loan interest is not deductible, it is probably a good strategy to pay off consumer loans by using a home equity loan. Essentially, a home equity loan is a second mortgage the major difference being that the borrower does not receive a lump-sum loan but, rather, has access to a revolving line of credit. When needed, money is withdrawn by check or credit card. Interest is deductible and rates are relatively low, subject to certain restrictions. Interest is deductible on loans up to $100,000. Interest paid on mortgages for first and second homes is still deductible, up to $1 million of total debt. For people who are not homeowners, or who do not want to put their homes up as collateral, there is another way to get a tax break on loan interest. Holders of brokerage accounts may still deduct interest against investment income. In general, brokerage firms charge relatively low interest rates for loans against accounts. Loan charges also tend to be low, because the collateral (stocks or bonds) is already in the brokerage s possession. In this way, investors can reduce their taxable investment income. Certain itemized deductions are subject to cutbacks when adjusted gross income reaches $ (single taxpayers) or $309,900 (couples). 8

9 ONE DEDUCTION THAT S EASY TO BOOST Most of our friends are aware that every dollar they give to us is tax deductible, assuming they itemize. For example, an annual gift of $500 actually costs you only $360 if you are in a 28% tax bracket. Savings from other taxes can reduce the cost of your gift even further. These savings are possible because Congress enacted laws to encourage support for the institutions and causes that you cherish. If you itemize your deductions, you can deduct your charitable contributions, generally up to a maximum of 50% of your adjusted gross income. Gifts of stock or other property can be deducted up to 30% of your income. Whichever limit is applicable, amounts in excess of this limitation can be carried over and deducted in the succeeding five years. 14 It is extremely advantageous, by the way, for donors to contribute assets that have appreciated in value such as stock, real estate or mutual fund shares. Our supporters can receive deductions augmented by their paper profit in securities or other property held more than 12 months. And they will owe no capital gains or investment income tax. 15 Example: Mrs. Newman is in the 33% tax bracket. She owns stock that cost her $2,000 and is now worth $5,000. If she sells the stock, she will keep only $4,436, due to the 15% capital gains tax and 3.8% investment income tax on her $3,000 longterm capital gain. However, by making a gift to us of the stock, she gets a $5,000 tax deduction that results in a $1,650 tax savings (33% x $5,000). In addition, she escapes paying any tax on her profit. So a substantial $5,000 gift actually will cost Mrs. Newman only $2,214 after subtracting capital gains and investment income tax savings of $564 and income tax savings of $1,650. PLAN YOUR GIFT CAREFULLY The advantage of carefully planning your gift of appreciated assets is obvious: You can make a substantial gift to us at only modest after-tax cost to yourself. Typical tax consequences of a wellplanned gift are: (1) The full fair market value of the asset is deductible in the year of the gift. (2) If the gift, coupled with other gifts, exceeds 30% of your income (the maximum deduction allowable for most gifts of appreciated property), the excess can be carried over and deducted in subsequent years. (3) No matter how much the asset has appreciated in value, you pay no capital gains tax on your paper profit. 9

10 In planning a gift of appreciated assets, it is advisable to make sure that: (1) The asset is capital gain property (i.e., property that would give rise to a long-term capital gain if it were sold at fair market value). (2) The asset, if it is tangible personal property, is related to our purposes. (3) The gift is completed at a time when the value of the asset is reasonably high. Selecting the right asset can be very important. A gift of securities held 12 months or less generally does not produce favorable tax consequences (your deduction will be limited to the cost of the property to you). Gifts of inventory generally do not produce the best tax results. On the other hand, a gift of mutual fund shares that have appreciated in value can give rise to splendid tax rewards. There are many methods of giving that will generate favorable tax consequences. Your own financial situation will determine the arrangement that will produce the greatest satisfaction for you at the lowest possible after-tax cost. The point is, with careful planning you can minimize your income taxes. Depending on tax considerations, perhaps your gift should be of securities... or life insurance... or mutual funds... or real estate. Maybe your gift should be immediate... or deferred for a certain period of time. Is a bargain sale in order? A trust? Perhaps you will benefit by giving this year... or it may be better to wait until next year. With so many factors for you to consider, our staff will be happy to help you plan your gift for maximum satisfaction and minimum after-tax cost. PLANNING FOR ALTERNATIVE MINIMUM TAX The alternative minimum tax (AMT) affects an increasing number of taxpayers. AMT is intended to ensure the individuals who claim numerous tax breaks pay a modicum of tax. AMT payment is required if it exceeds regular income tax. The tax is based on regular taxable income, increased by certain tax preferences and reduced by the AMT itemized deductions and an exemption amount, multiplied by the applicable AMT tax rates. 16 ALTERNATIVE MINIMUM TAX Regular Taxable Income + Tax Preference Items + Deductions Disallowed under AMT AMT Itemized Deductions Exemption Amount x AMT Tax Rate (26% on AMT income up to $185,400; 28% on AMT income in excess of $185,400) = Alternative Minimum Tax Due 10

11 Preference items that must be added back into adjusted gross income for the purpose of computing AMT liability include tax benefits realized from accelerated depreciation; the bargain element on stock options; percentage depletion; tax-exempt interest on nongovernmental purpose bonds; net passive losses; and research, exploration and intangible drilling cost. After adding AMT preference items to adjusted gross income, taxpayers can subtract certain AMT itemized deductions, such as medical expenses and casualty losses (to the extent they exceed 10% of adjusted gross income), charitable contributions and home mortgage interest. Finally, taxpayers can subtract their applicable AMT exemption. They must pay tax of 26% on AMT income up to $185,400 and 28% on AMT income in excess of $185,400 or pay their regular income tax amount, whichever is higher. Planning for AMT requires some work with a calculator and an estimate of your regular tax and potential AMT. If it appears you will be subject to AMT, it may be helpful to postpone some deductions until a year when you won t owe AMT; itemized deductions will save taxes only at a 26% or 28% rate under AMT. On the other hand, it may be advantageous to accelerate income into a year when you re subject to AMT. Each additional dollar will be taxed at a maximum of 28%, compared to 35% or 39.6% under regular tax rates. LONG-RANGE TAX PLANNING All too often taxpayers ignore the income tax until it is time to file a tax return. Then it is too late. Once the year is over, opportunities to plan for tax savings are lost for that year. Long-range planning, year-end reviews and a general awareness of tax consequences in daily affairs will almost surely permit you to minimize your future income tax liabilities. Tax law revisions may have affected your investment planning. For example, through 2015, dividends are taxed at a maximum rate of only 20% for taxpayers in the 39.6% bracket, 15% for taxpayers in the 35%, 33%, 28% or 25% brackets, and zero for 15% and 10% bracket taxpayers. Dividends may also be subject to a 3.8% investment income tax. When selling your home, consider the tax consequences. Married people can exclude up to $500,000 of gain on the sale of a principal residence, generally as often as every two years, $250,000 for singles

12 If it appears that you must sell at a loss, renting the property for a reasonable time will qualify your loss on a later sale as a deductible capital loss. The structure of your business can be important. Partners and sole proprietors are not eligible for all the valuable fringe benefits available to stockholder-employees. If you operate as an S corporation or partnership, you might consider the possible advantages of switching to a C corporation. 18 But note that individual tax rates are now lower than the top rates for corporations. When you plan your charitable gift, look carefully at the tax consequences. Choosing the right property to give, the right time to give and the right arrangement can permit you to carry out your objectives at minimum cost. Please write or call us if you would like assistance in planning any gift. YEAR-END PLANNING Planning at year s end frequently can pay handsome rewards. For example, it is often possible to postpone the receipt of income for a few months. Similarly, deductions both personal and business often can be timed. 19 Thus, in a year of high income, you may want to pull as many deductions as possible into the current year. If your income is lower than usual or you expect higher income or higher tax rates in the following year you may want to reverse this plan. Charitable gifts are by far the easiest, most flexible way to increase deductions in the current year. Every dollar you give before January 1 will be deductible on this year s tax return up to 50% of your adjusted gross income, if you itemize. Excess deductions can be carried over and deducted in future years. A $1,000 contribution saves $350 for a person in the 35% tax bracket, $250 for someone in the 25% bracket. Tax savings are not the reason friends support our endeavors, of course, but they do enable supporters to do more than they might have thought possible. INVESTMENTS AT YEAR S END A year-end review of your investments may offer tax saving opportunities. Perhaps your taxable income is unusually small. If you own stock or other capital assets with a big paper profit, it might be well to sell before year s end. That way the tax on your capital gain will have less impact on your tax bill. Even if you want to retain the stock, you can sell and immediately repurchase the same shares, giving you a higher cost basis. Conversely, if your income is higher than usual, consider selling a stock in which you have a paper loss. But look first at your capital gains to date. Capital losses must be used first to offset capital gains. The excess can then be used to reduce 12

13 ordinary income by up to $3,000 a year. 20 Example: Mr. Brown, in a 28% tax bracket, has a net long-term capital gain of $500 near year s end. He owns a security in which he has a paper loss of $2,500. By selling that security, he offsets the capital gain and reduces his ordinary income by $2,000, for tax savings of $635. If you deliberately create a capital loss, take care not to buy the same security within 30 days before or after the sale. Otherwise a wash sale results, and the loss will not be recognized for tax purposes. 21 A FINAL WORD We have discussed at length many taxsaving strategies, including ways that friends can make tax-wise gifts to provide for our future. It should be quickly added, however, that people decide to support our programs not because of tax savings but because they believe in our mission. Tax savings do enable friends to do far more to support our endeavors than might otherwise be possible. We would be pleased to discuss how your own gifts can be planned to provide the utmost in tax rewards... and personal satisfaction. 13

14 NOTES FOR TAX ADVISERS 1. I.R.C., 1. The 2015 level is $2,100, consisting of a $1050 floor plus the $1,050 of a standard deduction that a child may allocate to unearned income. This amount is indexed for inflation. Note that children may not claim depen dency exemptions if they are claimed by their parents [I.R.C., 151]. 2. I.R.C., 664. The tax law provides that to gain a deduction whether estate tax, income tax or gift tax for the present value of a charity s deferred interest, a so-called annuity trust or unitrust must be employed. There are a few exceptions to this rule. A gift of a remainder interest in a personal residence or farm can give rise to an immediate tax deduction. Furthermore, a remainder interest in a qualified pooled income fund maintained by a charity can qualify for a tax deduction. 3. This amount represents the present value of charity s remainder interest, as computed under the procedure set out in I.R.C. Reg This assumes a midterm interest rate of 2% and payments made quarterly. 4. Neither employer contributions nor income earned on such contributions is currently taxed to the employee. Employees of tax-exempt organizations may be eligible for tax-sheltered annuity arrangements. Premiums paid by a taxexempt organization for an annuity owned by an employee are not currently taxable to the employee [I.R.C., 403(b)]. 5. The ability to make Roth IRA contributions begins to phase out for individuals with modified AGI of $116,000 for single taxpayers and $183,000 for married persons. A traditional IRA may be converted into a Roth IRA, but taxes must be paid on rollover amounts. 6. Reg (a)(i)(c). Trusts may provide for a change from a net-income unitrust payout to a fixed percentage in the year following a triggering event. The deduction shown assumes a 2% midterm interest rate. 7. I.R.C., The transfer of property to a charitable remainder trust is not a sale or exchange that would trigger taxable gain. The trustee will assume the grantor s basis, but there will be no capital gains tax to the trust when the trustee later sells the property, because charitable remainder trusts are tax exempt. The deduction is based on a 2% midterm interest rate. 9. We have assumed that the trustee chooses to invest in stocks that produce primarily longterm capital gains and dividends, both currently taxed at a maximum rate of 20%. Generally, the character of income to the trust passes through to the beneficiary. Thus, ordinary income to the trust is ordinary income to the beneficiary; the same is true for dividends, capital gains, tax-exempt income and tax-free corpus [I.R.C., 652(b), 662(b)]. 10. Calculations assume quarterly payments and the use of a 2% federal midterm rate. 11. Medical expenses are deductible only to the extent they exceed 10% of the taxpayer s adjusted gross income [I.R.C., 213(a)]. 12. See Rev. Rul , C.B

15 13. The mileage allowance is currently $.14 per mile plus parking and tolls, or actual expenses. 14. I.R.C., 170(b)(1)(C),(d). Special limitations apply if the gift is for the use of charity and not to charity. 15. I.R.C., 170(e). There are special rules and generally less attractive tax consequences if you give appreciated property that would give rise to ordinary income or a short-term capital gain or if the gift is of tangible personal property that is not related to our exempt purposes. 16. I.R.C., I.R.C., 121. Sellers generally must have lived in the home for two of the previous five years before the sale. 18. See I.R.C., 1371, et seq. Physicians and others who operate as professional corporations likely will pay lower federal tax if they are taxed as S corporations. 19. Most individuals report their income and expenses on a cash basis. So the year of receipt or payment is generally controlling. 20. I.R.C., 1211, I.R.C., The materials contained in this booklet are intended to show only some of the ways you can benefit our future and minimize your federal tax liability with examples of anticipated federal tax liability. Thus, you should not take any action without first consulting your attorney. Chesapeake James W. Wynn Assistant VP, Development 7901 Annapolis Road Lanham, MD Tel: (301) x 242 Fax: (301) jwynn@voaches.org Copyright Published by R&R Newkirk. All Rights Reserved. 15