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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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Richard recently received $10,000 of compensation for some consulting work (paid in cash) .Jeffrey recently received $10,000 of interest income from City of Dallas bonds.Both taxpayers report no taxable income from these transactions.Is this considered tax avoidance or tax evasion? What is the difference,if any,between the two?

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Richard is engaged in tax evasion.Jeffre...

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Question 2

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The time value of money suggests that $1 in one year is worth less than $1 today.

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Question 3

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

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

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

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies discussed in class.

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

The constructive receipt doctrine

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest.What is Marsha's marginal tax rate?

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

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?

The timing strategy is based on the idea that where income is taxed affects the tax costs of the income.The timing strategy is based upon when income is taxed as opposed to where it is taxed.

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^th.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?

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?

Sal,a calendar year taxpayer,uses the cash-basis method of accounting for his sole proprietorship.In late December he performed $40,000 of consulting services for a client.Sal typically requires his clients to pay his bills immediately upon receipt.Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments.Should Sal send his client the bill in December or January?

Which of the following does not limit the income shifting strategy?

Which of the following strategies is based on the present value of money?

If Nicolai earns an 8% after-tax rate of return,$20,000 today would be worth how much to Nicolai in 5 years?

Antonella works for a company that pays a year-end bonus in December of each year.Assume that Antonella expects to receive a $20,000 bonus in December this year,her tax rate is 30%,and her after-tax rate of return is 8%.If Antonella's employer paid her bonus on January 1 of next year instead of December,how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32% next year,would receiving the bonus in January still be advantageous?

Rolando's employer pays year-end bonuses each year on December 31.Rolando,a cash basis taxpayer,would prefer to not pay tax on his bonus this year.So,he leaves town on December 31,2013 and doesn't pick up his check until January 2^nd,2014.When should Rolando report his bonus?