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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

A) True
B) False

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Question 52

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Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

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The constructive receipt doctrine limits...

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Question 53

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

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 2018 married filing joint 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) Note: New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase.

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?

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)

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

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)

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

The timing strategy becomes more attractive as tax rates decrease.

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)

Nontax factors do not play an important role in tax planning.

Which of the following may limit the conversion strategy?

If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

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?

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

Assume that Lavonia's marginal tax rate is 20%. If a city of Tampa bond pays 5% interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.