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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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The constructive receipt doctrine:

A) is particularly restrictive for accrual-basis taxpayers.
B) causes income to be recognized before it is actually received.
C) causes income to be recognized after it is actually received.
D) applies equally to income and expenses.
E) None of the choices are correct.

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

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Question 2

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The value of a tax deduction is higher for a taxpayer with a lower tax rate.

A) True
B) False

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Question 3

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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?

When considering cash inflows, higher present values are preferred.

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?

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to himself.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?

Assume that Will's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent.If a dividend-paying stock (with no growth potential) pays a dividend yield of 8 percent, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

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

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

If Rudy has a 25 percent tax rate and a 6 percent after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1.(Round discount factor(s) to three decimal places.)

Assume that John's marginal tax rate is 37 percent.If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

If tax rates are increasing:

Nontax factors do not play an important role in tax planning.

The assignment of income doctrine is a natural limitation to the timing strategy.

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

Jayzee is a single taxpayer who operates a sole proprietorship.He expects his taxable income next year to be $150,000, of which $125,000 is attributed to his sole proprietorship.Jayzee is contemplating incorporating his sole proprietorship.Using the 2019 single individual tax brackets and the corporate tax brackets, how much current tax could this strategy save Jayzee? (Ignore any Social Security, Medicare, or self-employment tax issues.)How much income should be retained in the corporation? (Use tax rate schedule)

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person.Use Exhibit 3.1. (Round discount factor(s)to three decimal places.) a.Kristi has a 40 percent tax rate and can defer $20,000 of income.Cindy has a 30 percent tax rate and can defer $30,000 of income. b.Kristy has a 30 percent tax rate and a 10 percent after-tax rate of return and can defer $25,000 of income for three years.Cindy has a 40 percent tax rate and an 8 percent after-tax rate of return and can defer $20,000 of income for four years.

Effective tax planning requires all of these considerations except:

Assume that Bill's marginal tax rate is 32 percent.If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

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.