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Exam 3: Tax Planning Strategies and Related Limitations

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Question 61

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Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from City of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

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Richard is engaged in tax evasion. Jeffr...

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Question 62

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If tax rates are decreasing:

A) taxpayers should accelerate income.
B) taxpayers should defer deductions.
C) taxpayers should defer income.
D) taxpayers should defer deductions and accelerate income.
E) None of the choices are correct.

F) None of the above
G) A) and B)

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Question 63

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

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

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus) . So, he leaves town on December 31, 2017 and has his daughter, Julie, pick up his check on January 2, 2018. Who reports the income and when?

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

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? Use Future value of $1. (Round present and future value factor(s) to 5 decimal places.)  

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

The goal of tax planning generally is to:

Future value can be computed as Future Value = Present Value/(1 + r)ⁿ.

A common income shifting strategy is to:

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

If Thomas has a 40% tax rate and a 6% after-tax rate of return, $50,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

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%, and her after-tax rate of return is 8%. 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% next year, would receiving the bonus in January still be advantageous?  Use Exhibit 3.1.

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 5 years or a smaller lump sum currently. 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%. If he chooses the current lump sum option, the lottery will pay him $130 million. b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.