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Exam 3: Tax Planning Strategies and Related Limitations

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Question 41

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In general,tax planners prefer to defer income.This is an example of the conversion strategy.

A) True
B) False

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Question 42

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Assume that Will's marginal tax rate is 32% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential) pays a dividend yield of 8%,what interest rate must the corporate bond offer for Will to be indifferent between the two investments?

A) 12%
B) 11%
C) 10%
D) 8%
E) None of these

F) C) and E)
G) C) and D)

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Question 43

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A taxpayer paying his 10 year old daughter $50,000 a year for consulting likely violates which doctrine?

Effective tax planning does not require consideration of:

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

If tax rates are decreasing:

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

Assuming an after-tax rate of return of 10%,John should prefer to pay $85 today instead of $100 in one year.1/(1 + .10) = .909 PV.$100 x.909 = $90.90 vs $85.00.

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

Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5% interest and a corporate bond that pays 6.25% interest.What is Javier's marginal tax rate?

In general,tax planners prefer to accelerate deductions.

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?

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

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?

Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

Assume that Lucas' marginal tax rate is 30% and his tax rate on dividends is 15%.If a dividend-paying stock (with no growth potential) pays an 8% dividend yield,what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments?

Rodney,a cash basis taxpayer,owes $40,000 in tax deductible consulting fees for his business.Assume that it is December 28 and that Rodney can avoid any finance charges if he pays the accounting fees by January 10^th.Rodney's tax rate this year is 30% and his after-tax rate of return is 10%.At what tax rate next year,will Rodney be indifferent between paying the $40,000 this year and next year?

Which of the following may limit the conversion strategy?

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?

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?