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Exam 3: Tax Planning Strategies and Related Limitations

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Question 61

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If Julius has a 32 percent tax rate and a 12 percent after-tax rate of return, a $58,000 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) $58,000
B) $14,792
C) $46,226
D) $18,560
E) None of the choices are correct.

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

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Question 62

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The income-shifting strategy requires taxpayers with varying tax rates.

A) True
B) False

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Question 63

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If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

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

Boeing is considering opening a plant in one of two neighboring states. One state has a corporate tax rate of 15 percent. If operated in this state, the plant is expected to generate $1,200,000 pretax profit. The other state has a corporate tax rate of 5 percent. If operated in this state, the plant is expected to generate $1,085,000 of pretax profit. Which state should Boeing choose based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pretax income?

Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.

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.)

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

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.)

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

Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Incorporated The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Incorporated stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

Assume that Bill's marginal tax rate is 17 percent. If corporate bonds pay 5 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds? (Do not round your final answer.)

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

Which of the following is not required to determine the best timing strategy?

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

Which of the following may limit the conversion strategy?

Assume that Juanita is indifferent between investing in a corporate bond that pays 8.40 percent interest and a stock with no growth potential that pays a 6.30 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?(Do not round intermediate computations.)

If Julius has a 32 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 10 percent. If a corporate bond pays 6.8 percent interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

Paying "fabricated" expenses in high tax rate years is an example of: