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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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Which of the following decreases the benefits of accelerating deductions?

A) Decreasing tax rates.
B) Smaller after-tax rate of return.
C) Larger after-tax rate of return.
D) Larger magnitude of transactions.
E) None of the choices are correct.

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

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Question 32

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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 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments.Should Sal send his client the bill in December or January? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

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Send the bill in December.
Option 1: Sen...

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Question 33

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

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

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs).Is Danny's view of tax planning correct-i.e., does he understand what the goal of tax planning is? Please elaborate.

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 percent, and her after-tax rate of return is 8 percent.If Antonella's employer paid her bonus on January 1 of next year instead of in December, how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32 percent next year, would receiving the bonus in January still be advantageous? Use Exhibit 3.1.

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

A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

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.)

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.)

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.)

A common income-shifting strategy is to:

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

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

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

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?

When considering cash outflows, higher present values are preferred.

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

Rob is currently considering investing in municipal bonds that earn 4 percent interest or taxable bonds issued by Dell Computer that pay 6.5 percent.If Rob's tax rate is 20 percent, which bond should he choose? Which bond should he choose if his tax rate is 30 percent? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?