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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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

A) Increasing tax rates.
B) A taxpayer with severe cash flow needs.
C) If continuing an investment would generate a low rate of return.
D) If continuing an investment would subject the taxpayer to unnecessary risk.
E) None of the choices are correct.

F) C) and D)
G) C) and E)

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Question 52

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

A) True
B) False

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Question 53

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

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

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. (Round present and future value amounts to 3 places)

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

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

The constructive receipt doctrine:

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

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?

If Rudy has a 25% tax rate and a 6% 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 present and future value amounts to 3 places)

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent. (1) Corporate bond issued at face value with 10 percent stated interest rate payable annually. (2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment. (3) Growth stock with an annual growth rate of 8 percent and no dividends paid. (Round your interim calculations to the nearest whole number)

Effective tax planning requires all of these considerations except:

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?

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?

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.

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? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

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

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?