Exam 3: Tax Planning Strategies and Related Limitations

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?

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

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

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?

If tax rates are increasing:

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

Assume that Bill's marginal tax rate is 30%.If corporate bonds pay 8% interest,what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

The assignment of income doctrine is a natural limitation to the timing strategy.

Rolando's employer pays year-end bonuses each year on December 31.Rolando,a cash basis taxpayer,would prefer to not pay tax on his bonus this year.So,he leaves town on December 31,2016 and doesn't pick up his check until January 2,2017.When should Rolando report his bonus?

The goal of tax planning is tax minimization.

Assuming an after-tax rate of return of 10%,John should prefer to pay an expense of $85 today instead of an expense of $100 in one year.Use Exhibit 3.1 in the text.

If Joel earns a 10% after-tax rate of return,$10,000 received in two years is worth how much today? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest.What is Javier's marginal tax rate?

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

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest.What is Marsha's marginal tax rate?

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield.Assume that the tax rate on dividends is 15%.What is Juanita's marginal tax rate?

If Scott earns a 12% after-tax rate of return,$15,000 today would be worth how much to Scott in 2 years? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)