Exam 3: Tax Planning Strategies and Related Limitations

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

If Lucy earns a 9 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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

The income-shifting and timing strategies are examples of:

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?

If tax rates are decreasing:

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

Which is not a basic tax planning strategy?

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

Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 7.2 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

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..

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

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?

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

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.

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

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.

Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 7.6 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

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

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