Exam 3: Tax Planning Strategies and Related Limitations

Assume that Will's marginal tax rate is 20 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays a dividend yield of 8.6 percent, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

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.

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

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent. (1)Corporate bond issued at face value with 10 percent stated interest rate payable annually. (2)Dividend-paying stock with an annual qualifying dividend equal to 10 percent of her investment. (3)Growth stock with an annual growth rate of 8 percent and no dividends paid. (Round your interim calculations to the nearest whole number.)

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

If Julius has a 32 percent tax rate and a 10 percent after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Rob is currently considering investing in municipal bonds that earn 4 percent interest or taxable bonds issued by Dell Computer that pay 6.5 percent. If Rob's tax rate is 20 percent, which bond should he choose? Which bond should he choose if his tax rate is 30 percent? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?

If Thomas has a 37 percent tax rate and a 7 percent after-tax rate of return, $66,500 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year. So, he leaves town on December 31, 2019, and doesn't pick up his check until January 2, 2020. When should Rolando report his bonus?

Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from city of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

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

If Tom invests $40,000 in a taxable corporate bond that provides a 8 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.

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 3.25 percent interest and a corporate bond that pays 4.75 percent interest. What is Marsha's marginal tax rate? (Do not round intermediate computations.)

Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6 percent dividend yield or bonds issued by the Coca-Cola Company that pay 8 percent. If Maurice's ordinary tax rate is 25 percent and his dividend tax rate is 15 percent, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30 percent? At what ordinary tax rate would he be indifferent between the stock and the bond? What strategy is this decision based upon?

If tax rates are decreasing:

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?

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

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 6.2 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?

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit 3.1. (Round discount factor(s)to three decimal places.) a. Kristi has a 40 percent tax rate and can defer $20,000 of income. Cindy has a 30 percent tax rate and can defer $30,000 of income. b. Kristy has a 30 percent tax rate and a 10 percent after-tax rate of return and can defer $25,000 of income for three years. Cindy has a 40 percent tax rate and an 8 percent after-tax rate of return and can defer $20,000 of income for four years..

A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?