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Exam 3: Tax Planning Strategies and Related Limitations

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Question 51

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The timing strategy is based on the idea that where income is taxed affects the tax costs of the income.

A) True
B) False

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Question 52

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

A) conversion
B) tax evasion
C) timing
D) income shifting
E) None of these

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

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Question 53

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Future value can be computed as Future Value = Present Value/(1 + r)n.

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

Effective tax planning does not require consideration of:

Which of the following decreases the benefits of accelerating deductions?

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. 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.

When considering cash outflows, higher present values are preferred.

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

The constructive receipt doctrine:

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

Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6% interest and a corporate bond that pays 8% interest. What is Marsha's marginal tax rate?

The timing strategy is particularly effective for cash basis taxpayers.

If tax rates are decreasing:

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

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

One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

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

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

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?