Question 1

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

Accepted Answer

None of the choices listed limit the benefits of deferring income.

Question 2

Assuming a positive interest rate, the present value of money suggests:

Accepted Answer

The present value of money concept states that a dollar today is worth more than a dollar in the future due to the potential earning capacity of money, assuming a positive interest rate.

Question 3

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? Use Future value of $1. (Round present and future value factor(s) to 5 decimal places.)

Accepted Answer

$20,000 × (1.08)⁵ = $29,387 or $20,000 × 1.46933 = $29,387.

Question 4

If tax rates are decreasing:

Accepted Answer

If tax rates are decreasing, taxpayers should defer their income. This is because if the tax rates are lower in the future, they will pay lower taxes on that income. If they accelerate their income, they will be taxed at higher rates. Deferring deductions or accelerating income may make sense in other situations, but not when tax rates are decreasing.

Question 5

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. (Round present and future value amounts to 3 places)

Accepted Answer

$8,000 × 0.792 (Discount Factor, 4 years, 6%) = $6,336.

Question 6

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

Accepted Answer

$40,000 × 0.30 (tax rate) × 0.826 (Discount Factor, 10%, 2 years) = $9,912.

Question 7

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

Accepted Answer

$10,000 × 0.826 (Discount Factor, 2 years, 10%) = $8,260.

Question 8

If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

Accepted Answer

$25,000 × 0.20 (tax rate) × 0.751 (Discount Factor, 10%, 3 years) = $3,755.

Question 9

If tax rates are decreasing:

Accepted Answer

The answer of If tax rates are decreasing:
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Question 10

Which of the following is not required to determine the best timing strategy?

Accepted Answer

The taxpayer's tax rate last year is not relevant to determining the best timing strategy. The after-tax rate of return, current and future tax rates are all important factors in making this determination.

Question 11

Which of the following increases the benefits of income deferral?

Accepted Answer

A larger after-tax rate of return increases the benefits of income deferral because it allows for more earnings on the deferred income, resulting in a higher overall return.

Question 12

The constructive receipt doctrine:

Accepted Answer

The constructive receipt doctrine dictates that income must be recognized when it is made available to the taxpayer, even if it has not been physically received. This can occur when income is credited to the taxpayer's account, when a check is available for pick-up, or when income is otherwise made available to the taxpayer. As a result, income can be recognized before it is actually received, which makes choice B the correct answer.

Question 13

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

Accelerating deductions reduces taxable income in the current period, thereby reducing current tax liability. However, if tax rates decrease in future periods, the benefit of reducing tax liability in the current period is reduced. Additionally, accelerating deductions may lead to a smaller after-tax rate of return on investments since the deductions reduce the tax base for investment earnings. This decreases the potential return on investments and therefore decreases the overall benefit of accelerating deductions. Choices A, C, and D do not decrease the benefits of accelerating deductions.

Question 14

If tax rates are increasing:

Accepted Answer

The answer of If tax rates are increasing:
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Question 15

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

Accepted Answer

Timing tax planning strategy is based on the present value of money, as it involves the decision of when to recognize income or expenses to maximize tax savings by considering the time value of money. The strategy involves deferring income or accelerating expenses to a future year or vice versa based on the expected inflation rate and interest rates, as the value of money changes over time. The other tax planning strategies such as tax avoidance, income shifting, and conversion are not necessarily based on the present value of money.

Question 16

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?

Accepted Answer

Time horizon doesn't affect after-tax rate of return on investments taxed annually.

Question 17

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? Future value of $1. (Round present and future value factor(s) to 5 decimal places.)

Accepted Answer

$15,000 × (1.12)² = $18,816 or $15,000 × 1.25440 = $18,816.

Question 18

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. (Round present and future value amounts to 3 places)

Accepted Answer

$50,000 × 0.40 (tax rate) × 0.747 (Discount Factor, 6%, 5 years) = $14,940.

Question 19

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2017 and doesn't pick up his check until January 2, 2018. When should Rolando report his bonus?

Accepted Answer

As a cash basis taxpayer, Rolando reports income in the year he received it. His year-end bonus was earned and became due to him in 2017, even if he didn't pick up the check until 2018. Therefore, he should report the bonus as income for 2017.

Question 20

If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

Accepted Answer

$30,000 × 0.25 (tax rate) × 0.792 (Discount Factor, 6%, 4 years) = $5,940.

Quiz 3: Tax Planning Strategies and Related Limitations

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

Assuming a positive interest rate, the present value of money suggests:

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? Use Future value of $1. (Round present and future value factor(s) to 5 decimal places.)

If tax rates are decreasing:

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. (Round present and future value amounts to 3 places)

If Julius has a 30% tax rate and a 10% after-tax rate of return, a $40,000 tax deduction in two years will save how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

If Joel earns a 10% after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

If Julius has a 20% tax rate and a 10% after-tax rate of return, $25,000 of income in three years will cost him how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)

If tax rates are decreasing:

Which of the following is not required to determine the best timing strategy?

Which of the following increases the benefits of income deferral?

The constructive receipt doctrine:

Which of the following decreases the benefits of accelerating deductions?

If tax rates are increasing:

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

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?

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? Future value of $1. (Round present and future value factor(s) to 5 decimal places.)

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. (Round present and future value amounts to 3 places)

Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash basis taxpayer, would prefer to not pay tax on his bonus this year. So, he leaves town on December 31, 2017 and doesn't pick up his check until January 2, 2018. When should Rolando report his bonus?

If Rudy has a 25% tax rate and a 6% after-tax rate of return, a $30,000 tax deduction in four years will save how much tax in today's dollars? Use Exhibit 3.1. (Round present and future value amounts to 3 places)