Exam 3: Tax Planning Strategies and Related Limitations

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?

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.

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.

Boeing is considering opening a plant in two neighboring states. One state has a corporate tax rate of 15%. If operated in this state, the plant is expected to generate $1,200,000 pre-tax profit. The other state has a corporate tax rate of 5%. If operated in this state, the plant is expected to generate $1,085,000 of pre-tax profit. Which state should Boeing choose based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pre-tax income?

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

In general, tax planners prefer to accelerate deductions.

The income shifting and timing strategies are examples of:

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

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

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?

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

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

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

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?