Exam 3: Tax Planning Strategies and Related Limitations

Antonella works for a company that pays a year-end bonus in December of each year. Assume that Antonella expects to receive a $20,000 bonus in December this year, her tax rate is 30 percent, and her after-tax rate of return is 8 percent. If Antonella's employer paid her bonus on January 1 of next year instead of in December, how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32 percent next year, would receiving the bonus in January still be advantageous? Use Exhibit 3.1.

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Question 1

Correct Answer:

Verified

If Antonella receives the $20,000 in December, she would have to pay $6,000 in tax in today's dollars. If Antonella receives the $20,000 on January 1, she would have to pay $6,000 in tax in one year. The present value of this payment is $5,556 ($6,000 × 0.926 (discount factor, one year, 8 percent)). Thus, receiving the payment on January 1 will save Antonella $444 ($6,000 − $5,556).
If her tax rate increased to 32 percent next year, Antonella would have to pay $6,400 of tax in one year ($20,000 × 0.32). The present value of this payment is $5,926.40 ($6,400 × 0.926 (discount factor, one year, 8 percent)). Thus, receiving the payment on January 1 will save Antonella $473.60 ($6,400 − $5,926.40)and would still be advantageous.

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

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Question 2

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

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Question 3

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True

Rodney, a cash-basis taxpayer, owes $72,500 in tax-deductible consulting fees for his business. Assume that it is December 28^th and that Rodney can avoid any finance charges if he pays the accounting fees by January 10^th. Rodney's tax rate this year is 32 percent and his after-tax rate of return is 6.5 percent. What tax rate next year will make Rodney indifferent between paying the $72,500 this year or next year? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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Question 4

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?

(Multiple Choice)

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Question 5

Which of the following may limit the conversion strategy?

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Question 6

Which of the following is needed to implement the income-shifting strategy?

(Multiple Choice)

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Question 7

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?

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Question 8

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, 2019, and has his daughter, Julie, pick up his check on January 2, 2020. Who reports the income and when?

(Multiple Choice)

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Question 9

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.

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Question 10

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

(Multiple Choice)

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Question 11

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

(True/False)

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Question 12

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)

(Multiple Choice)

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Question 13

In general, tax planners prefer to accelerate deductions.

(True/False)

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Question 14

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

(Multiple Choice)

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Question 15

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

(True/False)

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Question 16

Nontax factors do not play an important role in tax planning.

(True/False)

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Question 17

If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

(Multiple Choice)

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Question 18

Which of the following increases the benefits of income deferral?

(Multiple Choice)

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Question 19

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?

(Multiple Choice)

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Question 20

Showing 1 - 20 of 137

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

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

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?

Which of the following may limit the conversion strategy?

Which of the following is needed to implement the income-shifting strategy?

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

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

If Julius has a 22 percent tax rate and a 10 percent after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Rounddiscount factor(s)to three decimal places.)

In general, tax planners prefer to accelerate deductions.

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

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

Nontax factors do not play an important role in tax planning.

If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Which of the following increases the benefits of income deferral?

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 Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning

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