2016 Tax and Wealth Guide | Deloitte US | Tax


2016 essential tax and wealth planning guide

Tax planning in a transforming world

Tax Controversy

Before federal and state tax examiners request, preparation is critical

You might not be able to avoid an examination, but you can benefit by being prepared

What can make you a more likely target?
Since 2009, the IRS has had a division dedicated to Global High Wealth taxpayers. And according to IRS statistics, higher-income taxpayers are indeed more likely to be examined. People who earn more than $10 million have almost a one in four chance of meeting the agency across that table every year. (This is more than 25 times the average rate across all incomes.)

Certain types of financial, personal, or business activity may also attract inquiries:

  • Charitable donations and related substantiation
  • Sales transactions—both third-party and intrafamily
  • Businesses with potential elements of personal enjoyment (small farms, wineries, horse breeding and racing, etc.)
  • Gifting transactions
  • Losses, including passive activity determinations
  • Household employees and related employment tax considerations
  • Use of private aircraft

What's new?

  • IDR enforcement. A 2014 IRS directive for certain taxpayers shortens the time frame for enforcement of failure to respond to Information Document Requests (IDRs) in a timely manner. Nevertheless, examiners follow strict rules on how and when they issue IDRs.

  • AJAC tightens appeals. The Appeals Judicial Approach and Culture (AJAC) is meant to make the process of appealing an IRS audit more judicial and less an informal extension of the audit process. The intent is to protect taxpayers, which includes new rules to follow.

  • Driven focus. There are larger numbers of examinations that target a specific, defined issue that may yield positive results. However, traditional exams with broad requests for information also continue to affect taxpayers.

How can you be ready?
IRS examinations have a defined lifecycle, and along the way there are multiple options for resolving controversy. Your readiness begins with understanding how the process works.

  • Know your situation. Performing a risk assessment may help identify the specific areas upon which a potential IRS exam might focus. You may be able to have more information and potential options when you analyze possible issues before an IDR has been issued.
  • Confirm documentation. Is your auto or aircraft use taxable? Was that winery a business or a hobby? Small facts may impact significant tax issues.
  • Don't be a hero. Think hard before representing yourself before the IRS. A trained advisor can help you prepare, help you understand what kind of examination you face, and serve as an intermediary.
  • Think big. The planning that goes into your discussion with the IRS should be part of a larger plan that ties estate and income tax planning into a single, coherent reality. The IRS will examine the timeline and background—and you should too.


Crossing borders

As individuals and families move from place to place for personal, career, or business reasons, information reporting requirements and financial transparency affect more people than ever before.

It is increasingly common for family members to have different nationalities, to live in several countries during their lifetimes, and to accumulate assets in various jurisdictions. The United States and many other countries require increasing amounts of information reporting and financial transparency. The Foreign Account Tax Compliance Act (commonly known as FATCA), Common Reporting Standards (CRS) and related legislation will result in global information sharing to ensure compliance with local and international tax and reporting requirements.

  • Modern wealth is mobile
    More people are crossing borders for business and personal reasons—which means cross-border tax planning and reporting is more relevant than ever.

  • Choose your status wisely
    Citizen, "Green Gard holder," visitor, investor: your immigration status may affect your tax status and reporting requirements.

  • Get used to the spotlight
    CRS, FATCA, and other forces are changing reporting standards. Newcomers to the United States and other jurisdictions may be unprepared for the required levels of transparency and self-reporting.

  • Look before you leap
    Whether your move is personal or professional, there are immigration and tax planning considerations on which you should seek advice before you become a tax resident of a new jurisdiction.

Art & finance

Art as an asset class

Value has always been part of the art equation, but "financialization" is a fast-growing factor

The global market in art and collectible investments is surging past $600 billion*. Between the art market's own rapid growth and an array of external forces, there is a greater tendency to treat art as an asset class. That brings new business opportunities but also requires an awareness of the financial implications.

*Wealthinsight Luxury Investments Report, 2013

A shift in emphasis
Four out of five family offices and almost two-thirds of private banks report a strategic focus on art-based estate planning. Tax authorities recognize three categories of owner—and it's important to know into which one you fall, because the standards for taxation are different:

  • Collector Buys and sells art mostly for personal pleasure

  • Investor Buys and sells art primarily for investment purposes

  • Dealer Sells art as a trade or profession

What forces are driving art financialization?

  • Globalization
  • Democratization
  • Knowledge-sharing
  • Increased cultural interest
  • New communication channels

When art holds a place in your wealth plans, there are key considerations to address:

  • Monetization via loan
  • Art trust structures
  • Art estate planning
  • Museum loans (to enhance provenance)
  • Philanthropic planning and gifting
  • Auction house negotiations
  • Tax planning (including sales and use, cross-border transfer, and capital gains)
  • Anti-fraud and anti-money-laundering (AML) safeguards

Private aircraft

Finding the right flight plan

There's nothing like your own plane—but when it comes to taxes, you can't afford to have your head in the clouds

Private air travel continues to grow. Half the world's private jets are US-based. It's easy to appreciate the allure—not to mention access to more than 5,000 US airports, almost 10 times the number commercial flights can reach.*

However, it is just as important to appreciate the regulatory implications. You're dealing with the FAA in addition to the IRS and state authorities. And at tax time, questions concerning who owns the aircraft, who flew on it, and the reason for the flight may have a dramatic impact.

If owning an aircraft is the right choice, other choices remain. Different situations may necessitate direct personal ownership, ownership through a related entity, shared or joint ownership, or perhaps a leasing structure between related parties.

  • How often do you use the aircraft?
    If it is difficult to predict your usage, it will also be hard to predict the costs and benefits of private air travel. Using charters or a flight card at first may help you amass the information to decide about purchasing the aircraft.

  • Are your business passengers deductible?
    Generally, costs related to business passengers are fully deductible—but it is not always that simple. A single flight may mix business passengers and non-business "hitchhikers."

  • Does business mix with pleasure?
    It might make sense to use a different aircraft for each purpose to avoid diluting the deductibility of the business flights.

  • What's neither business nor pleasure?
    "Personal non-entertainment" flights involve destinations like funerals, visiting the sick, or receiving medical treatment. The non-entertainment distinction may impact deductibility.

  • Is love in the air?
    If an executive flying on business brings a spouse who is not an employee, the spouse's travel is usually not deductible. But there are exceptions—for example, on taxpayer-provided aircraft where the spouse's travel is considered to be "personal non-entertainment."

  • Are you crossing the border?
    It may be your plane, but it may also be in someone else's airspace—and subject to their rules. You should understand where jurisdictions end (including over water) and how taxes and other rules apply. These facts affect not only the cost of the flight but perhaps also the expenses that members of your party incur on the ground.

Marriage equality

Marriage equality, tax questions

When same-sex couples tie the knot, important tax changes can follow

Some of the "dominoes" of the Supreme Court decision about marriage equality are logical, but there are other areas where tax law hasn't caught up—and the marriage decision may have both tax advantages and disadvantages.

  • A level playing field…
    Now, married is married. That means same-sex spouses enjoy unlimited tax-free transfers (if both are US citizens), family medical leave, and recognition by state intestacy laws.

  • …that cuts both ways
    Being married also opens the door to divorce, alimony, and child custody issues, as well as potential exposure to the "marriage penalty."

  • A look forward into the past
    For those same-sex spouses who were lawfully married prior to full federal recognition, it may be advisable to analyze past income or gift tax returns for which the statute of limitations remains open and consider whether to file amended returns.

  • Back to the fine print
    Couples who marry may find it advisable to revisit Forms W-4, along with beneficiary choices in wills, revocable trusts, retirement plans, and life insurance policies.

Tax transformation

Tax transformation

Now is the time

Whether you are the head of a large corporation or the owner of a private company, you probably have been feeling the heavy demands being put on your tax function. Today's tax departments are under increasing pressure to deliver additional value to their organizations. Tax leaders must be able to understand the challenges faced, determine priorities, and develop and execute an action plan—leading to enhanced operational efficiency, improved risk management, and strategic alignment with the business.

Accelerating trends
What do tax pros view as the most powerful forces at work?

  • 33.6% Globalization
  • 34.5% Regulation
  • 17% Technology

Evolving expectations
What do tax pros feel their organizations want more of?

  • Strategic partnership

  • Better tech, data, process

  • Effective communication

  • Talent and succession

From abstraction to action:
Start with a plan

  • Define a vision
  • Prioritize initiatives
  • Build a work plan
  • Develop transformation roadmap

Things don't show up at your door as a tax issue. They show up as a business issue, and it's your job to find out whether there is a tax issue." – a tax executive
A tax advisor needs to be like a skier: his eyes should be way down the hill, not on his feet underneath him." – a tax executive

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