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Exam 3: Tax Planning Strategies and Related Limitations

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Question 71

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If Nicolai earns an 8 percent after-tax rate of return, $20,000 today would be worth how much to Nicolai in five years? Use future value of $1. (Round discount factor(s) to four decimal places.)

A) $20,000
B) $13,620
C) $18,520
D) $21,600
E) None of the choices are correct.

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

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Question 72

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Bobby and Whitney are husband and wife, and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $225,000, of which $175,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2020 married filing jointly tax brackets and the corporate tax brackets, how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule.)

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Assuming Bobby and Whitney's goal is to ...

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Question 73

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Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?

The constructive receipt doctrine:

If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1.(Round discount factor(s) to five decimal places.)

Joe Harry, a cash-basis taxpayer, owes $20,000 in tax-deductible accounting fees for his business. Assume that it is December 28^th 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 24 percent. His tax rate next year will be 32 percent. His after-tax rate of return is 8 percent. When should Joe Harry pay the $20,000 fees and why? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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 $24,000 of income. Cindy has a 30 percent tax rate and can defer $34,000 of income. b. Kristy has a 30 percent tax rate and a 11 percent after-tax rate of return and can defer $29,000 of income for three years. Cindy has a 40 percent tax rate and an 9 percent after-tax rate of return and can defer $24,000 of income for four years.

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?

If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

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

Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit3.1. a. Eddy has a 40 percent tax rate. Scott has a 30 percent tax rate. b. Eddy and Scott each have a 40 percent tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c. Eddy and Scott each have a 40 percent tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8 percent. Scott's after-tax rate of return is 10 percent. d. Eddy and Scott each have a 40 percent tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10 percent. Eddy can defer income up to three years. Scott can defer income up to two years.

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 3 percent interest and a corporate bond that pays 4.3 percent interest. What is Javier's marginal tax rate?

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

If Julius has a 32 percent tax rate and a 9 percent after-tax rate of return, a $34,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

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