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Exam 3: Tax Planning Strategies and Related Limitations

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Question 71

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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?

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Question 72

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Bono owns and operates a sole proprietorship and has a 32 percent marginal tax rate. He provides his son, Richie, $12,000 a year for college expenses. Richie works as a street musician and has a marginal tax rate of 15 percent. What could Bono do to reduce his family tax burden? How much pretax income does it currently take Bono to generate the $12,000 after taxes given to Richie? If Richie worked for his father's sole proprietorship, what salary would Bono have to pay him to generate $12,000 after taxes? (Ignore any Social Security, Medicare, or self-employment tax issues.)How much money would this strategy save?

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Question 73

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When considering cash inflows, higher present values are preferred.

Assume that Bill's marginal tax rate is 32 percent. If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

If Joel earns a 6 percent after-tax rate of return, $5,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

The constructive receipt doctrine:

Effective tax planning requires all of these considerations except:

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

Rob is currently considering investing in municipal bonds that earn 4 percent interest or taxable bonds issued by Dell Computer that pay 6.5 percent. If Rob's tax rate is 20 percent, which bond should he choose? Which bond should he choose if his tax rate is 30 percent? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?

The present value concept becomes more important as interest rates increase.

Assume that John's marginal tax rate is 17 percent. If a city of Austin bond pays 6.6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

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

Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?

If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1.(Round discount factor(s) to five decimal places.)

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

If Nicolai earns an 7 percent after-tax rate of return, $16,000 today would be worth how much to Nicolai in five years? Use future value of $1. (Round discount factor(s) to four decimal places.)