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Exam 3: Tax Planning Strategies and Related Limitations

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Question 31

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

A) 47%.
B) 37%.
C) 32%.
D) 15%.
E) None of these.

F) B) and E)
G) None of the above

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Question 32

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

A) increasing tax rates.
B) a taxpayer with severe cash flow needs.
C) if continuing an investment would generate a low rate of return.
D) if continuing an investment would subject the taxpayer to unnecessary risk.
E) none of these.

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

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Question 33

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Lucky owns a maid service that cleans several local businesses nightly. Lucky, a high-tax rate taxpayer, would like to shift some income to his son Rocco. Lucky tells all of his customers (who are always timely in their payments) to pay Rocco and then Rocco will report 50% of the income as a collection fee. Lucky will report the remaining 50%. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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?

Which is not a basic tax planning strategy?

The goal of tax planning is tax minimization.

Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? (1) Corporate bond issued at face value with 10 percent stated interest rate payable annually (2) Dividend-paying stock with an annual qualifying dividend equal to 10% of her investment (3) Growth stock with an annual growth rate of 8 percent and no dividends paid. (Round your interim calculations to the nearest whole number)

Bono owns and operates a sole proprietorship and has a 30% 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%. What could Bono do to reduce his family tax burden? How much pre-tax 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?

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

Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

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

The income shifting strategy requires taxpayers with varying tax rates.

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 from a cash-flow perspective?

If tax rates are decreasing:

When considering cash inflows, higher present values are preferred.

The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

Jayzee is a single taxpayer who operates a sole proprietorship. He expects his taxable income next year to be $150,000, of which $125,000 is attributed to his sole proprietorship. Jayzee is contemplating incorporating his sole proprietorship. Using the 2016 single individual tax brackets and the corporate tax brackets, how much current tax could this strategy save Jayzee? (Ignore any Social Security, Medicare, or Self Employment Tax issues.) How much income should be retained in the corporation?

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

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

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?