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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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

A) tax avoidance
B) tax evasion
C) conversion
D) income shifting
E) None of these

F) A) and B)
G) C) and D)

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Question 32

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The rewards of tax avoidance include stiff monetary penalties and imprisonment.

A) True
B) False

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Question 33

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

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

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

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

Future value can be computed as Future Value = Present Value/(1 + r) ⁿ.

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

The timing strategy becomes more attractive as tax rates decrease.

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

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

Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6% dividend yield or bonds issued by The Coca Cola Company that pay 8%.If Maurice's ordinary tax rate is 25% and his dividend tax rate is 15%,which investment should he choose? Which investment should he choose if his ordinary tax rate is 30%? At what ordinary tax rate would he be indifferent to the stock or to the bond? What strategy is this decision based upon?

Implicit taxes may reduce the benefits of the conversion strategy.

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 (rounded) ?

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 (rounded) ?

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.2% 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?

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years.What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

David,an attorney and cash basis taxpayer,is new to the concept of tax planning and recently learned of the timing strategy.To implement the timing strategy,David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees.Assume that David expects his marginal tax rates to remain constant over the foreseeable future.What is wrong with this 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 (rounded) ?

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.