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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

Multiple Choice

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

A) timing
B) tax avoidance
C) income shifting
D) conversion
E) None of these

F) A) and D)
G) A) and C)

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Question 52

Multiple Choice

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Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments?

A) 6%
B) 7%
C) 10.2%
D) 15%
E) None of these

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

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Question 53

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The timing strategy is particularly effective for cash basis taxpayers.

If tax rates are decreasing:

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

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

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?

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?

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

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?

If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars (rounded) ?

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years. What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

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

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person. a. Kristi has a 40% tax rate and can defer $20,000 of income. Cindy has a 30% tax rate and can defer $30,000 of income. b. Kristy has a 30% tax rate, a 10% after-tax rate of return, and can defer $25,000 of income for three years. Cindy has a 40% tax rate, an 8% after-tax rate of return, and can defer $20,000 of income for four years.

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

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2014 and doesn't pick up his check until January 2nd, 2015. When should Rolando report his bonus?

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

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

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