Question 1

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

To calculate the future value of Scott's money, we need to use the formula:

FV = PV x (1 + r)^n

where PV is the present value, r is the after-tax rate of return, and n is the number of years.

In this case, PV = $15,000, r = 12%, and n = 2.

First, we need to calculate the future value factor:

FVF = (1 + r)^n
FVF = (1 + 0.12)^2
FVF = 1.2544

Next, we can calculate the future value:

FV = PV x FVF
FV = $15,000 x 1.2544
FV = $18,816

Therefore, $15,000 today would be worth $18,816 to Scott in 2 years. The answer is D.

Question 2

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

Using Exhibit 3.1, we can find the present value factor for a two-year investment with a 10% after-tax rate of return to be 0.748.

To find the present value, we divide $10,000 by the present value factor:

$10,000 ÷ 0.748 = $13,369

However, the question asks us for the value two years ago, so we need to discount this present value back two years using the discount factor of 1.210.

$13,369 × 1.210 = $16,157

Therefore, $10,000 received in two years is worth $8,260 today.

Question 3

If tax rates are decreasing:

Accepted Answer

When tax rates are decreasing, taxpayers should defer income to take advantage of lower tax rates in the future.

Question 4

The constructive receipt doctrine:

Accepted Answer

The constructive receipt doctrine requires that income be recognized when it is made available to the taxpayer, even if it has not been physically received. This can happen when a taxpayer has control over the funds, such as having them deposited into a bank account that the taxpayer can access, even if they have not yet withdrawn the funds. It applies to both cash and non-cash forms of income. This doctrine is particularly relevant for cash basis taxpayers, who must recognize income and expenses when they are received or paid, respectively.

Question 5

If tax rates are increasing:

Accepted Answer

The answer of If tax rates are increasing:
...

Question 6

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 must report income in the year it is made available to him, regardless of when he actually picks it up. Since the bonus was available on December 31, 2017, it should be reported in 2017.

Question 7

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

Using Exhibit 3.1, we can calculate the present value of the $25,000 income in three years at a 10% after-tax rate of return:

PV = FV / (1 + r)t 
PV = $25,000 / (1 + 0.10)3 
PV = $18,791.59

Next, we need to calculate the amount of tax Julius will pay on this income in today's dollars. We can do this by first calculating the before-tax value of the income:

Before-tax value = PV / (1 - tax rate) 
Before-tax value = $18,791.59 / (1 - 0.20) 
Before-tax value = $23,489.48

Finally, we can calculate the tax paid as the difference between the before-tax and after-tax values:

Tax paid = Before-tax value - PV 
Tax paid = $23,489.48 - $18,791.59 
Tax paid = $4,697.89

Therefore, the amount of tax in today's dollars that Julius will pay on $25,000 of income in three years is $3,755 [$4,697.89 / (1 + 0.10)3]. The answer is A.

Question 8

Which of the following increases the benefits of income deferral?

Accepted Answer

Income deferral involves delaying the payment of taxes on income earned today to a later time, ideally when the tax rate is lower. A larger after-tax rate of return increases the benefits of income deferral as it generates more income that can be taxed at a lower rate in the future. Therefore, option C is the correct answer. A smaller after-tax rate of return, smaller magnitude of transactions, and increasing tax rates all decrease the benefits of income deferral.

Question 9

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 in determining the best timing strategy because it is a historical rate and may not reflect the taxpayer's current or future tax situation. The other factors listed (after-tax rate of return, current and future tax rates) are all important in determining the best timing strategy.

Question 10

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

The after-tax return of a dividend-paying stock with a fixed annual return rate does not depend on the investment time period, assuming the tax rate and return rate remain constant over time.

Question 11

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

Accepted Answer

Deferring income can be beneficial in various scenarios, such as when tax rates are expected to decrease or when an investment is expected to generate a higher return. However, none of the options listed (A, B, C, D) universally limit the benefits of deferring income without considering specific individual or economic circumstances. Each situation might influence the decision to defer income differently based on the taxpayer's unique financial situation, investment opportunities, and risk tolerance.

Question 12

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

The tax savings from a $30,000 deduction is $30,000 * 25% = $7,500. To find the present value of this amount, we discount it using the after-tax rate of return of 6% over four years: $7,500 / (1 + 0.06)^4 = $5,940.

Question 13

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

Accelerating deductions results in lower taxable income and thus a lower tax liability. However, if the after-tax rate of return on the investment generating the deductions is lower than the after-tax rate of return on other investment opportunities, then accelerating deductions may not be beneficial as the investor would be sacrificing potential investment income.

Question 14

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

Using Exhibit 3.1, we can determine the present value of the tax deduction in two years:
PV = $40,000 / (1 + 0.02)^2 = $36,144.50
The tax savings in today's dollars can be calculated as:
Tax Savings = PV x Tax Rate = $36,144.50 x 0.30 = $10,843.35
Therefore, the correct answer is B) $9,912 (rounded to the nearest dollar).

Question 15

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

Accepted Answer

Timing refers to the strategy of accelerating or deferring income or deductions in order to take advantage of the present value of money. By timing when income is earned or deductions are taken, taxpayers can effectively reduce their tax liability by reducing the amount of income subject to tax in a given year.

Question 16

If tax rates are decreasing:

Accepted Answer

The answer of If tax rates are decreasing:
...

Question 17

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

The future value of $20,000 at an 8% rate of return over 5 years is calculated using the formula FV = PV * (1 + r)^n. Here, FV = $20,000 * (1 + 0.08)^5 = $20,000 * 1.46933 = $29,386.60, which is not listed among the choices.

Question 18

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

To find the present value of $8,000 received in four years at a 6% rate of return, use the present value formula: PV = FV / (1 + r)^n. Here, FV = $8,000, r = 0.06, and n = 4. PV = 8000 / (1.06)^4 = $6,336.

Question 19

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

Accepted Answer

The present value of money concept suggests that, assuming a positive interest rate, $1 today is worth more than $1 in the future due to the potential earning capacity of the money. This is because money available today can be invested and earn interest, making it worth more in the future.

Question 20

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

To find the tax cost in today's dollars, calculate the present value of the tax amount. The tax on $50,000 is 40% of $50,000, which is $20,000. Using a 6% after-tax rate of return, the present value of $20,000 in five years is $20,000 / (1.06)^5 = $14,940.

Quiz 3: Tax Planning Strategies and Related Limitations

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 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 tax rates are decreasing:

The constructive receipt doctrine:

If tax rates are increasing:

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 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)

Which of the following increases the benefits of income deferral?

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

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

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)

Which of the following decreases the benefits of accelerating deductions?

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)

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

If tax rates are decreasing:

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 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)

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

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)