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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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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?

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If Antonella receives the $20,000 in Dec...

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Question 42

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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. Jeffr...

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Question 43

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

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

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

Implicit taxes may reduce the benefits of the conversion strategy.

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus) . So, he leaves town on December 31, 2014 and has his daughter, Julie, pick up his check on January 2nd, 2015. Who reports the income and when?

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) ?

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

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?

Assume that Larry's marginal tax rate is 25%. If corporate bonds pay 10% interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

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

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years?

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.2% interest and a stock with no growth potential that pays a 6% dividend yield. Assume that the tax rate on dividends is 15%. What is Juanita's marginal tax rate?

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.

The income shifting strategy requires taxpayers with varying tax rates.

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

The timing strategy becomes more attractive as tax rates decrease.

Which of the following may limit the conversion strategy?