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Exam 3: Tax Planning Strategies and Related Limitations

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Question 21

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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.

A) $88,647; $159,198.
B) $92,782; $178,414.
C) $79,621; $121,716.
D) $77,495; $113,750.
E) None of the choices are correct.

F) C) and D)
G) None of the above

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Question 22

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Which of the following increases the benefits of income deferral?

A) Increasing tax rates.
B) Smaller after-tax rate of return.
C) Larger after-tax rate of return.
D) Smaller magnitude of transactions.
E) None of the choices are correct.

F) C) and D)
G) B) and C)

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Question 23

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The constructive receipt doctrine is more of an issue for cash basis taxpayers.

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.

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

Joe Harry,a cash basis taxpayer,owes $20,000 in tax deductible accounting fees for his business.Assume that it is December 28 and that Joe Harry can avoid any finance charges if he pays the accounting fees by January 10.Joe Harry's tax rate this year is 30%.His tax rate next year will be 33%.His after-tax rate of return is 8%.When should Joe Harry pay the $20,000 fees and why?  Use Exhibit 3.1 in the text.

If Julius has a 20% tax rate and a 10% after-tax rate of return,$25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)

Which of the following is an example of the timing strategy?

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

The income shifting strategy requires taxpayers with varying tax rates.

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

Assuming a positive interest rate,the present value of money suggests:

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.2% 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?

Assume that Larry's marginal tax rate is 25%.If corporate bonds pay 10% interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to him.The next day he had his corporation declare a $30,000 dividend to him.Is this an effective income shifting strategy? If so,why? If not,why not? What recommendations do you have for Luther?

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

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

Bobby and Whitney are husband and wife and Whitney operates a sole proprietorship.They expect their joint taxable income next year to be $225,000,of which $150,000 is attributed to the sole proprietorship.Whitney is contemplating incorporating the sole proprietorship.Using the 2017 married filing joint tax brackets and the corporate tax brackets,how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule in the text; Corporate tax rate schedule in the text)

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

Rodney,a cash basis taxpayer,owes $40,000 in tax deductible consulting fees for his business.Assume that it is December 28 and that Rodney can avoid any finance charges if he pays the accounting fees by January 10.Rodney's tax rate this year is 30% and his after-tax rate of return is 10%.At what tax rate next year,will Rodney be indifferent between paying the $40,000 this year and next year? Use Exhibit 3.1 in the text.