## Taxation of Individuals

Business

## Quiz 3 :

Tax Planning Strategies and Related Limitations

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Q56 Q56 Q56

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year. So, he leaves town on December 31, 2018, and doesn't pick up his check until January 2, 2019. When should Rolando report his bonus?

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Multiple Choice

Q68 Q68 Q68

Jason's employer pays year-end bonuses each year on December 31. Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019. Who reports the income and when?

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Multiple Choice

Q79 Q79 Q79

Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential)pays an 8 percent 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?

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Multiple Choice

Q80 Q80 Q80

Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a city of Atlanta bond pays 7.65 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

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Multiple Choice

Q81 Q81 Q81

Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 10.20 percent interest, what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

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Multiple Choice

Q82 Q82 Q82

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

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Multiple Choice

Q83 Q83 Q83

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?

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Multiple Choice

Q84 Q84 Q84

Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

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Multiple Choice

Q93 Q93 Q93

Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit 3.1.
a. Eddy has a 40 percent tax rate. Scott has a 30 percent tax rate.
b. Eddy and Scott each have a 40 percent tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted.
c. Eddy and Scott each have a 40 percent tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8 percent. Scott's after-tax rate of return is 10 percent.
d. Eddy and Scott each have a 40 percent tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10 percent. Eddy can defer income up to three years. Scott can defer income up to two years.

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Q94 Q94 Q94

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.
(Round discount factor(s)to three decimal places.)
a. Kristi has a 40 percent tax rate and can defer $20,000 of income. Cindy has a 30 percent tax rate and can defer $30,000 of income.
b. Kristy has a 30 percent tax rate and a 10 percent after-tax rate of return and can defer $25,000 of income for three years. Cindy has a 40 percent tax rate and an 8 percent after-tax rate of return and can defer $20,000 of income for four years.

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Q95 Q95 Q95

David, an attorney and cash-basis taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees. Assume that David expects his marginal tax rates to remain constant over the foreseeable future. What is wrong with this strategy?

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Q97 Q97 Q97

Luther was very excited to hear about the potential tax savings from shifting income from his corporation to himself. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income-shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?

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Q100 Q100 Q100

Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

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Q101 Q101 Q101

Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from city of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

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Q102 Q102 Q102

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 percent, and her after-tax rate of return is 8 percent. 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 percent next year, would receiving the bonus in January still be advantageous? Use Exhibit 3.1.

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Q103 Q103 Q103

Joe Harry, a cash-basis taxpayer, owes $20,000 in tax-deductible accounting fees for his business. Assume that it is December 28

^{th}and that Joe Harry can avoid any finance charges if he pays the accounting fees by January 10^{th}. Joe Harry's tax rate this year is 24 percent. His tax rate next year will be 32 percent. His after-tax rate of return is 8 percent. When should Joe Harry pay the $20,000 fees and why? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)Free

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Q104 Q104 Q104

Rodney, a cash-basis taxpayer, owes $40,000 in tax-deductible consulting fees for his business. Assume that it is December 28

^{th}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 32 percent and his after-tax rate of return is 10 percent. What tax rate next year will make Rodney indifferent between paying the $40,000 this year or next year? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)Free

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Q105 Q105 Q105

Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000)in High Tech, Inc. The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Inc. stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

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Q106 Q106 Q106

O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in five years or a smaller lump sum now. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? Use Exhibit 3.1.
a. O'Reilly's after-tax return is 10 percent. If he chooses the current lump-sum option, the lottery will pay him $130 million.
b. O'Reilly's after-tax return is 10 percent. His current tax rate will be 35 percent if he receives the lottery payment now. His expected tax rate in five years will be 40 percent. If he chooses the current lump-sum option, the lottery will pay him $100 million.

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Q107 Q107 Q107

Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

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Q108 Q108 Q108

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 percent of the income as a collection fee. Lucky will report the remaining 50 percent. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

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Q109 Q109 Q109

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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Q110 Q110 Q110

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 2019 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? (Use tax rate schedule)

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Q111 Q111 Q111

Bobby and Whitney are husband and wife, and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $225,000, of which $175,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2019 married filing jointly tax brackets and the corporate tax brackets, how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule.)

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Q112 Q112 Q112

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?

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Q113 Q113 Q113

Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6 percent dividend yield or bonds issued by the Coca-Cola Company that pay 8 percent. If Maurice's ordinary tax rate is 25 percent and his dividend tax rate is 15 percent, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30 percent? At what ordinary tax rate would he be indifferent between the stock or the bond? What strategy is this decision based upon?

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Q114 Q114 Q114

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? Qualified dividends are taxed at 15 percent.
(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 percent 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.)

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Q115 Q115 Q115

Boeing is considering opening a plant in one of two neighboring states. One state has a corporate tax rate of 15 percent. If operated in this state, the plant is expected to generate $1,200,000 pretax profit. The other state has a corporate tax rate of 5 percent. If operated in this state, the plant is expected to generate $1,085,000 of pretax profit. Which state should Boeing choose based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pretax income?

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