FiltersDone

Question type

Essay

Multiple Choice

Short Answer

True False

Matching

Exam 3: Tax Planning Strategies and Related Limitations

Show Answer

Share

---

All types

Filters

Study FlashcardsPractice ExamLearn

Question 41

Essay

Review LaterAdd Note

Review Later

Rodney, a cash-basis taxpayer, owes $40,000 in tax-deductible consulting fees for his business. Assume that it is December 28^th and that Rodney can avoid any finance charges if he pays the accounting fees by January 10^th. Rodney's tax rate this year is 32 percent and his after-tax rate of return is 10 percent. What tax rate next year will make Rodney indifferent between paying the $40,000 this year or next year? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Correct Answer

verified

If Rodney pays the $40,000 in December, ...

View Answer

Show Answer

Question 42

Multiple Choice

Review LaterAdd Note

Review Later

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

A) The taxpayer's after-tax rate of return.
B) The taxpayer's tax rate this year.
C) The taxpayer's tax rate in future years.
D) The taxpayer's tax rate last year.
E) None of the choices are correct.

F) D) and E)
G) C) and E)

Correct Answer

verified

Show Answer

Question 43

Multiple Choice

Review LaterAdd Note

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

Assuming a positive interest rate, the present value of money suggests:

Bobby and Whitney are husband and wife, and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $225,000, of which $175,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2019 married filing jointly tax brackets and the corporate tax brackets, how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule.)

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

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

Effective tax planning requires all of these considerations except:

If tax rates are decreasing:

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

The concept of present value is an important part of the timing strategy.

Which of the following may limit the conversion strategy?

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

The time value of money suggests that $1 one year from now is worth less than $1 today.

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.

The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

Which of the following decreases the benefits of accelerating deductions?

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.

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

The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.