Lucinda is contemplating a long-range planning strategy that will allow her to defer sizable portions of her income for 10 years. What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Question

What will be an ideal response?

Answer 1

Lucinda is contemplating a long-term timing strategy. One risk to this type of strategy is that changes in the control of the White House and Congress may result in a fundamental shift in tax policy. Tax rate changes are rather frequent, as lawmakers use them as an integral part of fiscal or economic policy initiatives (e.g., to raise revenue, stimulate the economy, etc.). The risk to Lucinda is that newly elected officials will change the tax system in a way that eliminates the benefits of her tax planning strategies (e.g., increasing tax rates in the future may reduce or eliminate the benefits of income deferral).