Question 1

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 2

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)?

Accepted Answer

A)  $3,755 
B)  $18,775 
C)  $5,000 
D)  $25,000 
E)  None of these 
A)  $3,755 
B)  $18,775 
C)  $5,000 
D)  $25,000 
E)  None of these

Question 3

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 4

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

Accepted Answer

A) True 
 B)False

Question 5

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?

Accepted Answer

While this plan defers the taxation on h

Question 6

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?

Accepted Answer

A)  15% 
B)  10% 
C)  9% 
D)  7.65% 
E)  None of these 
A)  15% 
B)  10% 
C)  9% 
D)  7.65% 
E)  None of these

Question 7

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 8

The assignment of income doctrine is a natural limitation to the timing strategy.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following may limit the conversion strategy?

Accepted Answer

A)  implicit taxes 
B)  assignment of income doctrine 
C)  constructive receipt doctrine 
D)  activities with preferential tax rates 
E)  None of these 
A)  implicit taxes 
B)  assignment of income doctrine 
C)  constructive receipt doctrine 
D)  activities with preferential tax rates 
E)  None of these

Question 10

A common income shifting strategy is to:

Accepted Answer

A)  shift income from low tax rate taxpayers to high tax rate taxpayers 
B)  shift deductions from low tax rate taxpayers to high tax rate taxpayers 
C)  shift deductions from high tax rate taxpayers to low tax rate taxpayers 
D)  accelerate tax deductions 
E)  None of these 
A)  shift income from low tax rate taxpayers to high tax rate taxpayers 
B)  shift deductions from low tax rate taxpayers to high tax rate taxpayers 
C)  shift deductions from high tax rate taxpayers to low tax rate taxpayers 
D)  accelerate tax deductions 
E)  None of these

Question 11

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

Accepted Answer

A) $1 today = $1 in one year B) $1 today > $1 in one year C) $1 today < $1 in one year D) $1 today <= $1 in one year E) None of these A) $1 today = $1 in one year B) $1 today > $1 in one year C) $1 today < $1 in one year D) $1 today <= $1 in one year E) None of these

Question 12

The constructive receipt doctrine is more of an issue for cash basis taxpayers.

Accepted Answer

A) True 
 B)False

Question 13

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today (rounded)?

Accepted Answer

A)  $10,000 
B)  $9,090 
C)  $8,260 
D)  $11,000 
E)  None of these 
A)  $10,000 
B)  $9,090 
C)  $8,260 
D)  $11,000 
E)  None of these

Question 14

The business purpose, step-transaction, and substance-over-form doctrines may limit the income shifting strategy.

Accepted Answer

A) True 
 B)False

Question 15

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 16

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

Accepted Answer

A) True 
 B)False

Question 17

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield 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 18

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?

Accepted Answer

A)  30% 
B)  10.4% 
C)  8% 
D)  7% 
E)  None of these 
A)  30% 
B)  10.4% 
C)  8% 
D)  7% 
E)  None of these

Question 19

Which of the following is an example of the income shifting strategy?

Accepted Answer

A)  A corporation paying its shareholders a $20,000 dividend 
B)  A corporation paying its owner a $20,000 salary 
C)  A high tax rate taxpayer investing in tax exempt municipal bonds 
D)  A cash-basis business delaying billing its customers until after year end 
E)  None of these 
A)  A corporation paying its shareholders a $20,000 dividend 
B)  A corporation paying its owner a $20,000 salary 
C)  A high tax rate taxpayer investing in tax exempt municipal bonds 
D)  A cash-basis business delaying billing its customers until after year end 
E)  None of these

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 3: Tax Planning Strategies and Related Limitations

Which of the following decreases the benefits of accelerating deductions?

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)?

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?

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

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?

Effective tax planning does not require consideration of:

The assignment of income doctrine is a natural limitation to the timing strategy.

Which of the following may limit the conversion strategy?

A common income shifting strategy is to:

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

The constructive receipt doctrine is more of an issue for cash basis taxpayers.

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today (rounded)?

The business purpose, step-transaction, and substance-over-form doctrines may limit the income shifting strategy.

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

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

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

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?

Which of the following is an example of the income shifting strategy?

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

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

Filters