Exam 3: Tax Planning Strategies and Related Limitations

A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

Which of the following decreases the benefits of accelerating deductions?

The income shifting and timing strategies are examples of:

The timing strategy is particularly effective for cash basis taxpayers.

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

The value of a tax deduction is higher for a taxpayer with a lower tax rate.

Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

Which of the following tax planning strategies is based on the present value of money?

An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

If tax rates are increasing:

Antonella works for a company that pays a year-end bonus in December of each year. Assume that Antonella expects to receive a $20,000 bonus in December this year, her tax rate is 30%, and her after-tax rate of return is 8%. If Antonella's employer paid her bonus on January 1 of next year instead of in December, how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32% next year, would receiving the bonus in January still be advantageous?

Sal, a calendar year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 30% this year and 35% next year and that he can earn an after-tax rate of return of 12% on his investments. Should Sal send his client the bill in December or January?

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

Joe Harry, a cash basis taxpayer, owes $20,000 in tax deductible accounting fees for his business. Assume that it is December 28 and that Joe Harry can avoid any finance charges if he pays the accounting fees by January 10. Joe Harry's tax rate this year is 30%. His tax rate next year will be 33%. His after-tax rate of return is 8%. When should Joe Harry pay the $20,000 fees and why?

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