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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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

A) tax avoidance.
B) tax evasion.
C) conversion.
D) income shifting.
E) None of the choices are correct.

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

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Question 52

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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?

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Assuming an investor can earn a positive...

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Question 53

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Which of the following may limit the conversion strategy?

IN THE TEXT -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.

The conversion strategy capitalizes on the fact that tax rates vary across different activities.

If tax rates will be higher next year,taxpayers should defer their income to next year regardless of their after-tax rate of return.

Effective tax planning requires all of these considerations except:

The goal of tax planning generally is to:

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

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

Rob is currently considering investing in municipal bonds that earn 4% interest or taxable bonds issued by Dell Computer that pay 6.5%.If Rob's tax rate is 20%,which bond should he choose? Which bond should he choose if his tax rate is 30%? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?

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?

The constructive receipt doctrine:

Assume that Lavonia's marginal tax rate is 20%.If a city of Tampa bond pays 5% interest,what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A common income shifting strategy is to:

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.

If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return,how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

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

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

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