Question 1

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

Accepted Answer

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

Question 2

If Julius has a 30% tax rate and a 10% 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 in the text.(Round present and future value amounts to 3 places)

Accepted Answer

A)  $40,000. 
B)  $9,912. 
C)  $33,040. 
D)  $12,000. 
E)  None of the choices are correct. 
A)  $40,000. 
B)  $9,912. 
C)  $33,040. 
D)  $12,000. 
E)  None of the choices are correct.

Question 3

The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting strategy.

Accepted Answer

A) True 
 B)False

Question 4

Paying "fabricated" expenses in high tax rate years is an example of:

Accepted Answer

A)  conversion. 
B)  tax evasion. 
C)  timing. 
D)  income shifting. 
E)  None of the choices are correct. 
A)  conversion. 
B)  tax evasion. 
C)  timing. 
D)  income shifting. 
E)  None of the choices are correct.

Question 5

The time value of money suggests that $1 in one year from now is worth less than $1 today.

Accepted Answer

A) True 
 B)False

Question 6

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

Accepted Answer

A) True 
 B)False

Question 7

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 conflicting recommendations? What information do you need to determine the appropriate action?

Accepted Answer

The two basic timing-related tax rate st

Question 8

O'Reilly is a masterful lottery player.The megamillion jackpot is now up to $200 million.If O'Reilly wins the jackpot,he has a choice of receiving $200 million in 5 years or a smaller lump sum currently.Advise O'Reilly on his choice under the following scenarios.Which option should he take and why? Use Exhibit 3.1 in the text.
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 su

Question 9

Sal,a calendar year taxpayer,uses the cash-basis method of accounting for his sole proprietorship.In late December he performed $40,000 of consulting services for a client.Sal typically requires his clients to pay his bills immediately upon receipt.Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments.Should Sal send his client the bill in December or January? Use Exhibit 3.1 in the text.

Accepted Answer

Send the bill in December.
Option 1: Sen

Question 10

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years.What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Accepted Answer

Lucinda is contemplating a long-term tim

Question 11

Effective tax planning requires all of these considerations except:

Accepted Answer

A)  nontax factors. 
B)  the taxpayer's tax costs of alternative transactions. 
C)  the other party's tax costs of alternative transactions. 
D)  the other party's nontax costs of alternative transactions. 
E)  all of the choices are required considerations. 
A)  nontax factors. 
B)  the taxpayer's tax costs of alternative transactions. 
C)  the other party's tax costs of alternative transactions. 
D)  the other party's nontax costs of alternative transactions. 
E)  all of the choices are required considerations.

Question 12

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 13

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

Accepted Answer

Maurice's after tax rate of return on th

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  Taxpayers with varying tax rates. 
B)  Decreasing tax rates. 
C)  Increasing tax rates. 
D)  Unrelated taxpayers. 
E)  None of the choices are correct. 
A)  Taxpayers with varying tax rates. 
B)  Decreasing tax rates. 
C)  Increasing tax rates. 
D)  Unrelated taxpayers. 
E)  None of the choices are correct.

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield.Assume that the tax rate on dividends is 15%.What is Jose's marginal tax rate?

Accepted Answer

A)  47%. 
B)  37%. 
C)  32%. 
D)  15%. 
E)  None of the choices are correct. 
A)  47%. 
B)  37%. 
C)  32%. 
D)  15%. 
E)  None of the choices are correct.

Question 20

Tax savings generated from deductions are considered cash inflows.

Accepted Answer

A) True 
 B)False

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

If Julius has a 30% tax rate and a 10% 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 in the text.(Round present and future value amounts to 3 places)

The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting strategy.

Paying "fabricated" expenses in high tax rate years is an example of:

The time value of money suggests that $1 in one year from now is worth less than $1 today.

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

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 conflicting recommendations? What information do you need to determine the appropriate action?

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years.What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Effective tax planning requires all of these considerations except:

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

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

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

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

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.

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?

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield.Assume that the tax rate on dividends is 15%.What is Jose's marginal tax rate?

Tax savings generated from deductions are considered cash inflows.

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

Filters

Exam 3: Tax Planning Strategies and Related Limitations

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

If Julius has a 30% tax rate and a 10% 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 in the text.(Round present and future value amounts to 3 places)

The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting strategy.

Paying "fabricated" expenses in high tax rate years is an example of:

The time value of money suggests that $1 in one year from now is worth less than $1 today.

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

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 conflicting recommendations? What information do you need to determine the appropriate action?

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years.What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Effective tax planning requires all of these considerations except:

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

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

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

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

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.

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?

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield.Assume that the tax rate on dividends is 15%.What is Jose's marginal tax rate?

Tax savings generated from deductions are considered cash inflows.

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

Filters