Question 1

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

Accepted Answer

A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of the choices are correct. 
A) tax avoidance. 
B) tax evasion. 
C) conversion. 
D) income shifting. 
E) None of the choices are correct.

Question 2

The goal of tax planning is tax minimization.

Accepted Answer

A) True 
 B)False

Question 3

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

Accepted Answer

A) True 
 B)False

Question 4

If tax rates will be higher next year,taxpayers should defer their income to next year regardless of their after-tax rate of return.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

A) Decreasing tax rates. 
B) Smaller after-tax rate of return. 
C) Larger after-tax rate of return. 
D) Larger magnitude of transactions. 
E) None of the choices are correct. 
A) Decreasing tax rates. 
B) Smaller after-tax rate of return. 
C) Larger after-tax rate of return. 
D) Larger magnitude of transactions. 
E) None of the choices are correct.

Question 6

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?

Accepted Answer

A) 22 percent. 
B) 5 percent. 
C) 7 percent. 
D) 3)9 percent. 
E) None of the choices are correct. 
A) 22 percent. 
B) 5 percent. 
C) 7 percent. 
D) 3)9 percent. 
E) None of the choices are correct.

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return,how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Accepted Answer

A) $88,647; $159,198. 
B) $92,782; $178,414. 
C) $79,621; $121,716. 
D) $77,495; $113,750. 
E) None of the choices are correct. 
A) $88,647; $159,198. 
B) $92,782; $178,414. 
C) $79,621; $121,716. 
D) $77,495; $113,750. 
E) None of the choices are correct.

Question 9

David,an attorney and cash-basis taxpayer,is new to the concept of tax planning and recently learned of the timing strategy.To implement the timing strategy,David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees.Assume that David expects his marginal tax rates to remain constant over the foreseeable future.What is wrong with this strategy?

Accepted Answer

While this plan defers the taxation on h

Question 10

Which of the following does not limit the benefits of deferring income?

Accepted Answer

A) Increasing tax rates. 
B) A taxpayer with severe cash flow needs. 
C) If continuing an investment would generate a low rate of return. 
D) If continuing an investment would subject the taxpayer to unnecessary risk. 
E) None of the choices are correct. 
A) Increasing tax rates. 
B) A taxpayer with severe cash flow needs. 
C) If continuing an investment would generate a low rate of return. 
D) If continuing an investment would subject the taxpayer to unnecessary risk. 
E) None of the choices are correct.

Question 11

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

Accepted Answer

A) conversion. 
B) tax evasion. 
C) timing. 
D) income shifting. 
E) None of the choices are correct. 
A) conversion. 
B) tax evasion. 
C) timing. 
D) income shifting. 
E) None of the choices are correct.

Question 12

Which of the following is an example of the conversion strategy?

Accepted Answer

A) A corporation paying its shareholders a $20,000 dividend. 
B) A corporation paying its owner a $20,000 salary. 
C) A high tax rate taxpayer investing in tax exempt municipal bonds. 
D) A cash-basis business delaying billing its customers until after year end. 
E) None of the choices are correct. 
A) A corporation paying its shareholders a $20,000 dividend. 
B) A corporation paying its owner a $20,000 salary. 
C) A high tax rate taxpayer investing in tax exempt municipal bonds. 
D) A cash-basis business delaying billing its customers until after year end. 
E) None of the choices are correct.

Question 13

Which of the following is not required to determine the best timing strategy?

Accepted Answer

A) The taxpayer's after-tax rate of return. 
B) The taxpayer's tax rate this year. 
C) The taxpayer's tax rate in future years. 
D) The taxpayer's tax rate last year. 
E) None of the choices are correct. 
A) The taxpayer's after-tax rate of return. 
B) The taxpayer's tax rate this year. 
C) The taxpayer's tax rate in future years. 
D) The taxpayer's tax rate last year. 
E) None of the choices are correct.

Question 14

A common income-shifting strategy is to:

Accepted Answer

A) shift income from low tax rate taxpayers to high tax rate taxpayers. 
B) shift deductions from low tax rate taxpayers to high tax rate taxpayers. 
C) shift deductions from high tax rate taxpayers to low tax rate taxpayers. 
D) accelerate tax deductions. 
E) None of the choices are correct. 
A) shift income from low tax rate taxpayers to high tax rate taxpayers. 
B) shift deductions from low tax rate taxpayers to high tax rate taxpayers. 
C) shift deductions from high tax rate taxpayers to low tax rate taxpayers. 
D) accelerate tax deductions. 
E) None of the choices are correct.

Question 15

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

Accepted Answer

A) conversion. 
B) tax evasion. 
C) timing. 
D) income shifting. 
E) None of the choices are correct. 
A) conversion. 
B) tax evasion. 
C) timing. 
D) income shifting. 
E) None of the choices are correct.

Question 16

Jared,a tax novice,has recently learned of several foreign tax havens (i.e.,countries with low tax rates).He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates.What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

Accepted Answer

The concept of implicit taxes suggests t

Question 17

When considering cash outflows,higher present values are preferred.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

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?

Accepted Answer

Lucinda is contemplating a long-term tim

Question 20

The goal of tax planning generally is to:

Accepted Answer

A) minimize taxes. 
B) minimize IRS scrutiny. 
C) maximize after-tax wealth. 
D) support the federal government. 
E) None of the choices are correct. 
A) minimize taxes. 
B) minimize IRS scrutiny. 
C) maximize after-tax wealth. 
D) support the federal government. 
E) None of the choices are correct.

Exam 3: Tax Planning Strategies and Related Limitations

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

The goal of tax planning is tax minimization.

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

If tax rates will be higher next year,taxpayers should defer their income to next year regardless of their after-tax rate of return.

Which of the following decreases the benefits of accelerating deductions?

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?

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

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return,how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

Which of the following does not limit the benefits of deferring income?

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

Which of the following is an example of the conversion strategy?

Which of the following is not required to determine the best timing strategy?

A common income-shifting strategy is to:

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

When considering cash outflows,higher present values are preferred.

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

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?

The goal of tax planning generally is to:

An Introduction to Tax

Tax Compliance,the Irs,and Tax Authorities

Individual Income Tax Overview,dependents,and Filing Status

Gross Income and Exclusions

Individual Deductions

Investments

Individual Income Tax Computation and Tax Credits

Business Income,deductions,and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation,reorganization,and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Ustaxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters

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