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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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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?

A) 12%
B) 11%
C) 10%
D) 8%
E) None of these

F) A) and E)
G) B) and E)

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Question 42

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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 10th. 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?

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If Joe Harry pays the $20,000 in Decembe...

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Question 43

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In general, tax planners prefer to accelerate deductions.

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years?

Effective tax planning does not require consideration of:

If tax rates are increasing:

The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase.

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

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

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

A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

Lucky owns a maid service that cleans several local businesses nightly. Lucky, a high-tax rate taxpayer, would like to shift some income to his son Rocco. Lucky tells all of his customers (who are always timely in their payments) to pay Rocco and then Rocco will report 50% of the income as a collection fee. Lucky will report the remaining 50%. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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

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?

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

In general, tax planners prefer to defer income. This is an example of the conversion strategy.

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 (rounded) ?

Which of the following decreases the benefits of accelerating deductions?

Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

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?