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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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

A) True
B) False

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Question 32

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The timing strategy becomes more attractive as tax rates decrease.

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B) False

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Question 33

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Explain why $1 today is not equal to $1 in the future.Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

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

Assuming an after-tax rate of return of 10 percent,John should prefer to pay an expense of $85 today instead of an expense of $100 in one year.Use Exhibit 3.1.

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

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

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

The present value concept becomes more important as interest rates increase.

If tax rates are increasing:

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?

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

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

The income-shifting and timing strategies are examples of:

Assume that Bill's marginal tax rate is 32 percent.If corporate bonds pay 8 percent interest,what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

If Lucy earns a 6 percent after-tax rate of return,$8,000 received in four years is worth how much today? Use Exhibit 3.1.(Round discount factor(s) to three decimal places.)

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

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.)

Which of the following is an example of the income-shifting strategy?

The assignment of income doctrine is a natural limitation to the timing strategy.