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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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The goal of tax planning generally is to:

A) Minimize taxes
B) Minimize IRS scrutiny
C) Maximize after-tax wealth
D) Support the Federal government
E) None of these

F) A) and B)
G) A) and E)

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Question 52

Multiple Choice

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Assume that Larry's marginal tax rate is 25%.If corporate bonds pay 10% interest,what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

A) 25%
B) 12.5%
C) 10%
D) 7.5%
E) None of these

F) D) and E)
G) All of the above

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Question 53

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The income shifting strategy requires taxpayers with varying tax rates.

Tax savings generated from deductions are considered cash inflows.

The goal of tax planning is tax minimization.The goal of tax planning is the maximization of after-tax wealth while achieving the taxpayer's nontax goals.

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

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

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

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

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

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

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 (rounded) ?

When considering cash outflows,higher present values are preferred.

Which is not a basic tax planning strategy?

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

Lucky owns a maid service that cleans several local businesses nightly.Lucky,a high-tax rate taxpayer,would like to shift some income to his son Rocco.Lucky tells all of his customers (who are always timely in their payments) to pay Rocco and then Rocco will report 50% of the income as a collection fee.Lucky will report the remaining 50%.Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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

If tax rates are increasing:

If Scott earns a 12% after-tax rate of return,$15,000 today would be worth how much to Scott in 2 years?

An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions.Explain why this is true.Be specific.