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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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

A) True
B) False

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Question 52

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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 31,2016 and has his daughter,Julie,pick up his check on January 2,2017.Who reports the income and when?

A) Julie in 2016.
B) Julie in 2017.
C) Jason in 2016.
D) Jason in 2017.
E) None of the choices are correct.

F) A) and E)
G) A) and D)

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Question 53

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Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%.If a city of Atlanta bond pays 7.65% interest,what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

The constructive receipt doctrine:

Which of the following does not limit the income shifting strategy?

A common income shifting strategy is to:

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 in the text.

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.

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 2017 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 in the text; Corporate tax rate schedule in the text)

Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e.,reducing taxes at all costs).Is Danny's view of tax planning correct - i.e.,does he understand what the goal of tax planning is? Please elaborate.

When considering cash inflows,higher present values are preferred.

Jared,a tax novice,has recently learned of several foreign tax havens (i.e.,countries with low tax rates).He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates.What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

Boeing is considering opening a plant in two neighboring states.One state has a corporate tax rate of 15%.If operated in this state,the plant is expected to generate $1,200,000 pre-tax profit.The other state has a corporate tax rate of 5%.If operated in this state,the plant is expected to generate $1,085,000 of pre-tax 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 pre-tax income?

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

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Based only on the information provided for each scenario,determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person.Exhibit 3.1 in the text. a.Eddy has a 40% tax rate.Scott has a 30% tax rate. b.Eddy and Scott each have a 40% tax rate.Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted. c.Eddy and Scott each have a 40% tax rate and $20,000 of income that could be deferred.Eddy's after-tax rate of return is 8%.Scott's after-tax rate of return is 10%. d.Eddy and Scott each have a 40% tax rate,$20,000 of income that could be deferred,and an after-tax rate of return of 10%.Eddy can defer income up to 3 years.Scott can defer income up to 2 years.

Nontax factors do not play an important role in tax planning.

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

Which of the following decreases the benefits of accelerating deductions?