Exam 3: Tax Planning Strategies and Related Limitations

The business purpose,step-transaction,and substance-over-form doctrines may limit the income shifting 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? Use Exhibit 3.1.(Round present and future value amounts to 3 places)

If Joel earns a 10% after-tax rate of return,$10,000 received in two years is worth how much today? Use Exhibit 3.1.(Round present and future value amounts to 3 places)

Compare and contrast the constructive receipt doctrine and the assignment of income doctrine. In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

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

The timing strategy is particularly effective for cash basis taxpayers.

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

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?

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

If Rudy has a 25% tax rate and a 6% after-tax rate of return,a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1.(Round present and future value amounts to 3 places)

Richard recently received $10,000 of compensation for some consulting work (paid in cash).Jeffrey recently received $10,000 of interest income from City of Dallas bonds.Both taxpayers report no taxable income from these transactions.Is this considered tax avoidance or tax evasion? What is the difference,if any,between the two?

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

Tax savings generated from deductions are considered cash inflows.

Assuming an after-tax rate of return of 10%,John should prefer to pay an expense of $85 today instead of an expense of $100 in one year.Use Exhibit 3.1.

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.

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

The goal of tax planning is tax minimization.

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.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.

Implicit taxes may reduce the benefits of the conversion strategy.

Assume that Bill's marginal tax rate is 30%.If corporate bonds pay 8% interest,what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?