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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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In general, tax planners prefer to accelerate deductions.

A) True
B) False

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Question 42

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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 from a cash-flow perspective?

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

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

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Question 43

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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 theaccounting fees by January 10. Rodney's tax rate this year is 30% and his after-tax rate of return is10%. At what tax rate next year, will Rodney be indifferent between paying the $40,000 this year and next year? Use Exhibit 3.1.

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

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

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

Which is not a basic tax planning strategy?

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus) . So, he leaves town on December 31, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when?

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?

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

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

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

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

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?

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?

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 conflictingrecommendations? What information do you need to determine the appropriate action?

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

Which of the following decreases the benefits of accelerating deductions?

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

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