Exam 3: Tax Planning Strategies and Related Limitations

An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions.Explain why this is true.Be specific.

The income-shifting strategy requires taxpayers with varying tax rates.

Paying "fabricated" expenses in high tax rate years is an example of:

Future value can be computed as Future Value = Present Value/(1 + r)ⁿ.

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

In general, tax planners prefer to defer income.This is an example of the conversion strategy.

Assume that Lavonia's marginal tax rate is 22 percent.If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

The timing strategy is particularly effective for cash-basis taxpayers.

Jason's employer pays year-end bonuses each year on December 31.Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus).So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019.Who reports the income and when?

Which of the following is an example of the income-shifting strategy?

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person.Use Exhibit 3.1. a.Eddy has a 40 percent tax rate.Scott has a 30 percent tax rate. b.Eddy and Scott each have a 40 percent tax rate.Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c.Eddy and Scott each have a 40 percent tax rate and $20,000 of income that could be deferred.Eddy's after-tax rate of return is 8 percent.Scott's after-tax rate of return is 10 percent. d.Eddy and Scott each have a 40 percent tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10 percent.Eddy can defer income up to three years.Scott can defer income up to two years.

The goal of tax planning generally is to:

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?

Which of the following may limit the conversion strategy?

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent.If a corporate bond pays 10.20 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent.If a city of Atlanta bond pays 7.65 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

The income-shifting and timing strategies are examples of: