Question 1

Which is not a basic tax planning strategy?

Accepted Answer

A)  Income shifting. 
B)  Arms-length transaction. 
C)  Conversion. 
D)  Timing. 
E)  None of the choices are correct. 
A)  Income shifting. 
B)  Arms-length transaction. 
C)  Conversion. 
D)  Timing. 
E)  None of the choices are correct.

Question 2

In general, tax planners prefer to accelerate deductions.

Accepted Answer

A) True 
 B)False

Question 3

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

Accepted Answer

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

Question 4

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. IfO'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lumpsum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? Use Exhibit 3.1.   a. O'Reilly's after-tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million.b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.

Accepted Answer

(A) IF O'REILLY TAKES THE CURRENT LUMP S

Question 5

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Accepted Answer

A)  11%. 
B)  10%. 
C)  8%. 
D)  12%. 
E)  None of the choices are correct. 
A)  11%. 
B)  10%. 
C)  8%. 
D)  12%. 
E)  None of the choices are correct.

Question 6

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine.In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

Accepted Answer

The constr

Question 7

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

Accepted Answer

A)  5 years. 
B)  20 years. 
C)  1 year. 
D)  10 years. 
E)  All yield the same after-tax return. 
A)  5 years. 
B)  20 years. 
C)  1 year. 
D)  10 years. 
E)  All yield the same after-tax return.

Question 8

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not 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, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when?

Accepted Answer

A)  Jason in 2017. 
B)  Julie in 2016. 
C)  Jason in 2016. 
D)  Julie in 2017. 
E)  None of the choices are correct. 
A)  Jason in 2017. 
B)  Julie in 2016. 
C)  Jason in 2016. 
D)  Julie in 2017. 
E)  None of the choices are correct.

Question 9

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflictingrecommendations? What information do you need to determine the appropriate action?

Accepted Answer

The two basic timing-related t

Question 10

Rodney, a cash basis taxpayer, owes $40,000 in tax deductible consulting fees for his business.Assume that it is December 28 and that Rodney can avoid any finance charges if he pays theaccounting fees by January 10. Rodney's tax rate this year is 30% and his after-tax rate of return is10%. At what tax rate next year, will Rodney be indifferent between paying the $40,000 this year and next year? Use Exhibit 3.1.

Accepted Answer

Tax Savings = $40,000 × tax rate × 0.909

Question 11

The present value concept becomes more important as interest rates increase.

Accepted Answer

A) True 
 B)False

Question 12

The timing strategy becomes more attractive as interest rates (i.e., rates of return)increase.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The concept of present value is an important part of the timing strategy.

Accepted Answer

A) True 
 B)False

Question 15

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

Accepted Answer

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

Question 16

If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

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

Question 18

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Accepted Answer

Assuming an investor can earn a positive

Question 19

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Accepted Answer

A)  8%. 
B)  7%. 
C)  20%. 
D)  4%. 
E)  None of the choices are correct. 
A)  8%. 
B)  7%. 
C)  20%. 
D)  4%. 
E)  None of the choices are correct.

Question 20

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Accepted Answer

A)  7.50%. 
B)  10.00%. 
C)  12.50%. 
D)  25.00%. 
E)  None of the choices are correct. 
A)  7.50%. 
B)  10.00%. 
C)  12.50%. 
D)  25.00%. 
E)  None of the choices are correct.

Exam 3: Tax Planning Strategies and Related Limitations

Which is not a basic tax planning strategy?

In general, tax planners prefer to accelerate deductions.

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

Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine.In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflictingrecommendations? What information do you need to determine the appropriate action?

The present value concept becomes more important as interest rates increase.

The timing strategy becomes more attractive as interest rates (i.e., rates of return)increase.

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

The concept of present value is an important part of the timing strategy.

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

If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

Which of the following decreases the benefits of accelerating deductions?

Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Exemptions, 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 US Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

Filters