Question 1

When considering cash outflows, higher present values are preferred.

Accepted Answer

A) True 
 B)False

Question 2

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?

Accepted Answer

A)  50% 
B)  40% 
C)  30% 
D)  20% 
E)  None of these 
A)  50% 
B)  40% 
C)  30% 
D)  20% 
E)  None of these

Question 3

Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person.
a. Kristi has a 40% tax rate and can defer $20,000 of income. Cindy has a 30% tax rate and can defer $30,000 of income.
b. Kristy has a 30% tax rate, a 10% after-tax rate of return, and can defer $25,000 of income for three years. Cindy has a 40% tax rate, an 8% after-tax rate of return, and can defer $20,000 of income for four years.

Accepted Answer

(a) Cindy, because she can defer $9,000

Question 4

The constructive receipt doctrine is a natural limitation for the conversion strategy.

Accepted Answer

A) True 
 B)False

Question 5

If tax rates are decreasing:

Accepted Answer

A)  taxpayers should accelerate income 
B)  taxpayers should defer deductions 
C)  taxpayers should accelerate deductions 
D)  taxpayers should defer deductions and accelerate income 
E)  None of these 
A)  taxpayers should accelerate income 
B)  taxpayers should defer deductions 
C)  taxpayers should accelerate deductions 
D)  taxpayers should defer deductions and accelerate income 
E)  None of these

Question 6

Which of the following does not limit the benefits of deferring income?

Accepted Answer

A)  increasing tax rates 
B)  a taxpayer with severe cash flow needs 
C)  if continuing an investment would generate a low rate of return 
D)  if continuing an investment would subject the taxpayer to unnecessary risk 
E)  None of these 
A)  increasing tax rates 
B)  a taxpayer with severe cash flow needs 
C)  if continuing an investment would generate a low rate of return 
D)  if continuing an investment would subject the taxpayer to unnecessary risk 
E)  None of these

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

Paying "fabricated" expenses in high tax rate years is an example of:

Accepted Answer

A)  conversion 
B)  tax evasion 
C)  timing 
D)  income shifting 
E)  None of these 
A)  conversion 
B)  tax evasion 
C)  timing 
D)  income shifting 
E)  None of these

Question 9

Which of the following is an example of the timing strategy?

Accepted Answer

A)  A cash basis taxpayer paying all outstanding bills by year end 
B)  A parent employing her child in the family business 
C)  A business paying its owner a $30,000 salary 
D)  A taxpayer investing in a tax preferred investment 
E)  None of these 
A)  A cash basis taxpayer paying all outstanding bills by year end 
B)  A parent employing her child in the family business 
C)  A business paying its owner a $30,000 salary 
D)  A taxpayer investing in a tax preferred investment 
E)  None of these

Question 10

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?

Accepted Answer

A)  20% 
B)  8% 
C)  7% 
D)  4% 
E)  None of these 
A)  20% 
B)  8% 
C)  7% 
D)  4% 
E)  None of these

Question 11

Effective tax planning does not require consideration of:

Accepted Answer

A)  nontax factors 
B)  the taxpayer's tax costs of alternative transactions 
C)  the other party's tax costs of alternative transactions 
D)  the other party's nontax costs of alternative transactions 
E)  None of these 
A)  nontax factors 
B)  the taxpayer's tax costs of alternative transactions 
C)  the other party's tax costs of alternative transactions 
D)  the other party's nontax costs of alternative transactions 
E)  None of these

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

The timing strategy is particularly effective for cash basis taxpayers.

Accepted Answer

A) True 
 B)False

Question 15

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

Accepted Answer

A) True 
 B)False

Question 16

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

A) True 
 B)False

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

A)  decreasing tax rates 
B)  smaller after-tax rate of return 
C)  larger after-tax rate of return 
D)  larger magnitude of transactions 
E)  None of these 
A)  decreasing tax rates 
B)  smaller after-tax rate of return 
C)  larger after-tax rate of return 
D)  larger magnitude of transactions 
E)  None of these

Question 20

The constructive receipt doctrine:

Accepted Answer

A)  is particularly restrictive for accrual basis taxpayers 
B)  causes income to be recognized before it is actually received 
C)  causes income to be recognized after it is actually received 
D)  applies equally to income and expenses 
E)  None of these 
A)  is particularly restrictive for accrual basis taxpayers 
B)  causes income to be recognized before it is actually received 
C)  causes income to be recognized after it is actually received 
D)  applies equally to income and expenses 
E)  None of these

Exam 3: Tax Planning Strategies and Related Limitations

When considering cash outflows, higher present values are preferred.

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 constructive receipt doctrine is a natural limitation for the conversion strategy.

If tax rates are decreasing:

Which of the following does not limit the benefits of deferring income?

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

Paying "fabricated" expenses in high tax rate years is an example of:

Which of the following is an example of the timing strategy?

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?

Effective tax planning does not require consideration of:

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

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

The timing strategy is particularly effective for cash basis taxpayers.

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

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 decreases the benefits of accelerating deductions?

The constructive receipt doctrine:

An Introduction to Tax

Tax Compliance, the Irs, and Tax Authorities

Individual Income Tax Overview, Exemptions, and Filing Status

Gross Income and Exclusions

Individual Deductions

Individual Income Tax Computation and Tax Credits

Business Income, Deductions, and Accounting Methods

Property Acquisition and Cost Recovery

Property Dispositions

Investments

Compensation

Retirement Savings and Deferred Compensation

Tax Consequences of Home Ownership

Entities Overview

Corporate Operations

Accounting for Income Taxes

Corporate Taxation: Nonliquidating Distributions

Corporate Formation, Reorganization, and Liquidation

Forming and Operating Partnerships

Dispositions of Partnership Interests and Partnership Distributions

S Corporations

State and Local Taxes

The Us Taxation of Multinational Transactions

Transfer Taxes and Wealth Planning of the Cfa Institute

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