Exam 34: Taxes and Investment Planning

An individual in the top tax bracket is planning to establish a new corporation and is weighing the choice between the C corporation form and the S corporation form.She expects the corporation to be profitable each year,with all profits reinvested except to the extent needed to pay corporate taxes or shareholder taxes on profits.The shareholder's plan is to sell the business after six years for a substantial gain.The C corporation will qualify as a small business corporation under Sec.1202.Applying the C Corporation Model and the Flow-Through Model

In the Pension Model,the initial investment is deductible or excludible from gross income,and investment earnings are taxed currently.

The nondeductible traditional IRA is a classic example of the Pension Model.

Given that D_n is the amount of deferred compensation received in lieu of $1 currently,which one of the following decision rules can the employee and the employer apply when evaluating whether deferred compensation is preferable to current salary?

Savings accounts and money market funds are examples of investments taxed under the Current Model.

If t₀ is the tax rate in Year 0,t_n is the tax rate in Year n,and ATA is after-tax accumulation,then which one of the following does not hold true?

Given that D_n is the amount of deferred compensation received in lieu of $1 currently,then if the employee's indifference level of D_n exceeds the employer's indifference level of D_n,the employee must accept current salary because the employer will not pay the employee's required deferred compensation.

Will invests $20,000 of after-tax dollars (AT$)in tax-exempt municipal bonds which yield 5% per year.He reinvests the interest in the same bonds and holds the bonds for two years.Will's marginal tax rate is 25%.What is his after-tax accumulation at the end of two years?

The Deferred Model investment outperforms the Current Model investment if interest rates and tax rates are constant over time because the interest on the Deferred Model investment grows tax free until withdrawal.

The C Corporation Model is a variation of the Flow-Through Model,where taxation occurs at both the entity and the owner levels.

The Deferred Model offers two levels of tax deferral-the original contribution escapes current taxation as do the earnings on the underlying investment.

The Deferred Model has all of the following characteristics except for

Jan can invest $4,000 of after-tax dollars (AT$)directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case the bond yields an annual 4% before-tax rate of return (BTROR).Jan's marginal tax rate is 15%,and she expects it to remain so for the entire investment horizon of 25 years.What is her annualized after-tax rate of return (annualized ATROR)for the "bond inside the IRA"?

Discuss the decision rules for current salary versus deferred compensation.

Brianna purchases stock for $8,000.The stock appreciates (grows)at a 6% rate before taxes.Brianna sells the stock ten years later for $14,327.Brianna has a 39.6% marginal tax rate,but the stock sale is a LTCG taxed at 20%.Ignore the 3.8% Medicare surtax on net investment income.What are Brianna's after-tax proceeds?

Flow-through entities include partnerships,limited liability companies,limited liability partnerships,and C corporations.

Which of the following is a classic example of the Deferred Model?

Sylvia makes a one-time $2,000 deductible contribution into a deductible traditional IRA account,which will earn 8% annually before taxes.Twenty-five years later,at age 65,she withdraws all of the accumulation from the IRA when she is in the 15% marginal tax bracket.What is the total of her after-tax accumulated proceeds from the IRA?

Common examples of the Pension Model include all of the following except for

The Flow-Through Model used for S corporations and partnerships is an application of the