Exam 3: Tax Planning Strategies and Related Limitations

The income shifting strategy requires taxpayers with varying tax rates.

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to him. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash basis taxpayer, would prefer to not pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2016 and has his daughter, Julie, pick up his check on January 2, 2017. Who reports the income and when?

If Jim invested $100,000 in an annual-dividend paying stock today with a 7 percent return, what investment time period will give Jim the greatest after-tax return?

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?

The goal of tax planning generally is to:

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?

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today? (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?

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in 5 years or a smaller lump sum currently. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? a. O'Reilly's after-tax return is 10%. If he chooses the current lump sum option, the lottery will pay him $130 million. b. O'Reilly's after-tax return is 10%. His current tax rate will be 35% if he receives the lottery payment now. His expected tax rate in five years will be 40%. If he chooses the current lump sum option, the lottery will pay him $100 million.

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

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

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

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

When considering cash inflows, higher present values are preferred.

If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

Lucinda is contemplating a long range planning strategy that will allow her to defer sizable portions of her income for 10 years. What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

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

Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%. If a corporate bond pays 10.2% interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

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?