Exam 3: Tax Planning Strategies and Related Limitations

Assume that John's marginal tax rate is 40%. If a city of Austin bond pays 6% interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

David, an attorney and cash basis taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees. Assume that David expects his marginal tax rates to remain constant over the foreseeable future. What is wrong with this strategy?

The income shifting strategy requires taxpayers with varying tax rates.

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

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 2018 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) Note: New Corporate income tax rate has been mentioned as "21% on all taxable income" as per the recent change.

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest. What is Javier's marginal tax rate?

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

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years. What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.20% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

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?

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?

Which is not a basic tax planning strategy?

When considering cash outflows, higher present values are preferred.

If tax rates are increasing:

Assume that Jose is indifferent between investing in a corporate bond that pays 10% interest and a stock with no growth potential that pays an 8% dividend yield. Assume that the tax rate on dividends is 15%. What is Jose's marginal tax rate?

Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

The income shifting and timing strategies are examples of:

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