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Exam 3: Tax Planning Strategies and Related Limitations

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Question 1

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Explain why $1 today is not equal to $1 in the future.Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

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Assuming an investor can earn a positive...

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Question 2

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If Thomas has a 40% tax rate and a 6% after-tax rate of return,$50,000 of income in five years will cost him how much tax in today's dollars? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)

A) $50,000.
B) $20,000.
C) $37,350.
D) $14,940.
E) None of the choices are correct.

F) A) and D)
G) A) and B)

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Question 3

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If Nicolai earns an 8% after-tax rate of return,$20,000 today would be worth how much to Nicolai in 5 years? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)

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

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?

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?

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

In general,tax planners prefer to accelerate deductions.

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

The income shifting and timing strategies are examples of:

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

Based only on the information provided for each scenario,determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person.Use Exhibit 3.1 in the text. a.Kristi has a 40% tax rate and can defer $20,000 of income.Cindy has a 30% tax rate and can defer $30,000 of income. b.Kristy has a 30% tax rate,a 10% after-tax rate of return,and can defer $25,000 of income for three years.Cindy has a 40% tax rate,an 8% after-tax rate of return,and can defer $20,000 of income for four years.

The timing strategy is particularly effective for cash basis taxpayers.

If Lucy earns a 6% after-tax rate of return,$8,000 received in four years is worth how much today? Use Exhibit 3.1 in the text.(Round present and future value amounts to 3 places)  

A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

Implicit taxes may reduce the benefits of the conversion strategy.

Which of the following may limit the conversion strategy?

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

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