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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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

A) The taxpayer's after-tax rate of return.
B) The taxpayer's tax rate this year.
C) The taxpayer's tax rate in future years.
D) The taxpayer's tax rate last year.
E) None of the choices are correct.

F) C) and E)
G) A) and C)

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Question 42

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Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield.Assume that the tax rate on dividends is 15 percent.What is Juanita's marginal tax rate?

A) 50 percent.
B) 40 percent.
C) 30 percent.
D) 15 percent.
E) None of the choices are correct.

F) None of the above
G) C) and D)

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Question 43

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

Which is not a basic tax planning strategy?

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5 percent interest and a corporate bond that pays 6.25 percent interest.What is Javier's marginal tax rate?

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 2019 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.)

The time value of money suggests that $1 one year from now is worth less than $1 today.

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

The concept of present value is an important part of the timing strategy.

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

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

If tax rates are decreasing:

Rodney, a cash-basis taxpayer, owes $40,000 in tax-deductible consulting fees for his business.Assume that it is December 28^th and that Rodney can avoid any finance charges if he pays the accounting fees by January 10^th.Rodney's tax rate this year is 32 percent and his after-tax rate of return is 10 percent.What tax rate next year will make Rodney indifferent between paying the $40,000 this year or next year? Use Exhibit 3.1.(Round discount factor(s)to three decimal places.)

If Julius has a 22 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

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?

Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

O'Reilly is a masterful lottery player.The megamillion jackpot is now up to $200 million.If O'Reilly wins the jackpot, he has a choice of receiving $200 million in five years or a smaller lump sum now.Advise O'Reilly on his choice under the following scenarios.Which option should he take and why? Use Exhibit 3.1. a.O'Reilly's after-tax return is 10 percent.If he chooses the current lump-sum option, the lottery will pay him $130 million. b.O'Reilly's after-tax return is 10 percent.His current tax rate will be 35 percent if he receives the lottery payment now.His expected tax rate in five years will be 40 percent.If he chooses the current lump-sum option, the lottery will pay him $100 million.

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

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