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Exam 3: Tax Planning Strategies and Related Limitations

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Question 21

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

A) True
B) False

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Question 22

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Jayzee is a single taxpayer who operates a sole proprietorship. He expects his taxable income next year to be $150,000, of which $125,000 is attributed to his sole proprietorship. Jayzee is contemplating incorporating his sole proprietorship. Using the 2019 single individual tax brackets and the corporate tax brackets, how much current tax could this strategy save Jayzee? (Ignore any Social Security, Medicare, or self-employment tax issues.)How much income should be retained in the corporation? (Use tax rate schedule)

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Assuming Jayzee's goal is to minimize hi...

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Question 23

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The income-shifting and timing strategies are examples of:

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?

If tax rates are increasing:

Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential) pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

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

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.

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?

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

Implicit taxes may reduce the benefits of the conversion strategy.

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?

Which of the following does not limit the benefits of deferring income?

Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

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?

The constructive receipt doctrine:

A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.