Exam 3: Tax Planning Strategies and Related Limitations

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.

Virtually every transaction involves the taxpayer and two other parties that have aninterest in the tax ramifications of the transaction.

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 $150,000 is attributed to the soleproprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2017 married filing joint 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; Corporate tax rate schedule)

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

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-payingstock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

If tax rates are increasing:

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. Use Exhibit 3.1. 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.