Exam 3: Tax Planning Strategies and Related Limitations

Assume that Keisha's marginal tax rate is 40% and her tax rate on dividends is 15%. If a city of Atlanta bond pays 7.65% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments?

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest. What is Marsha's marginal tax rate?

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

The rewards of tax avoidance include stiff monetary penalties and imprisonment.

There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

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

If tax rates are decreasing:

Rodney, a cash basis taxpayer, owes $40,000 in tax deductible consulting fees for his business. Assume that it is December 28 and that Rodney can avoid any finance charges if he pays the accounting fees by January 10th. Rodney's tax rate this year is 30% and his after-tax rate of return is 10%. At what tax rate next year, will Rodney be indifferent between paying the $40,000 this year and next year?

Which of the following increases the benefits of income deferral?

If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars (rounded)?