Question 1

If Thomas has a 37 percent tax rate and a 6 percent 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 discount factor(s)to three decimal places.)

Accepted Answer

Using the formula in Exhibit 3.1, the discount factor for five years at 6 percent is 0.747. Therefore, $50,000 in five years is worth $37,350 today. Thomas's tax rate of 37 percent means he will pay $13,820 ($37,350 x 0.37) in taxes in today's dollars. Therefore, the correct choice is D.

Question 2

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 3

Which of the following increases the benefits of income deferral?

Accepted Answer

Income deferral allows money to grow tax-free until withdrawal in the future. A larger after-tax rate of return means that the money grows more quickly, leading to even greater benefits when withdrawn in the future. Smaller after-tax rate of return would reduce the benefits of income deferral. Increasing tax rates and smaller magnitude of transactions do not necessarily impact the benefits of income deferral.

Question 4

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

Accepted Answer

The present value of money is the consideration of the time value of money. By timing certain transactions, a taxpayer can take advantage of the present value of money and potentially reduce their tax liability. For example, a taxpayer may choose to defer income until a future year when their tax rate is expected to be lower, thus maximizing the present value of their money.

Question 5

The constructive receipt doctrine:

Accepted Answer

The constructive receipt doctrine requires income to be recognized when it is made available, rather than when it is actually received. This means that if money is set aside for a taxpayer but they choose not to receive it, they still must recognize it as income. This doctrine applies to both cash and non-cash forms of income.

Question 6

If Julius has a 22 percent tax rate and a 10 percent 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 discount factor(s)to three decimal places.)

Accepted Answer

To calculate the present value of the taxes Julius will pay on $25,000 of income in three years, we need to first calculate the future value of $25,000 in three years with a 10% after-tax rate of return. Using Exhibit 3.1, we find the discount factor for three years at 10% to be 0.751, so the future value of $25,000 is:

$25,000 x 1.10 x 0.751 = $20,762.50

Next, we need to calculate the before-tax cost of earning $20,762.50 in three years, taking into account Julius's 22% tax rate. Using Exhibit 3.1, we find the discount factor for three years at 22% to be 0.698, so the before-tax cost is:

$20,762.50 ÷ 0.698 = $29,739.80

Finally, we need to calculate the present value of the taxes Julius will pay on $20,762.50 of income in three years at a tax rate of 22%. Using Exhibit 3.1, we find the discount factor for three years at a tax rate of 22% to be 0.792, so the present value of the taxes is:

$20,762.50 x 0.22 x 0.792 = $3,858.76

Rounding to the nearest dollar, the present value of the taxes Julius will pay in today's dollars is $4,131. Therefore, the correct answer is A) $4,131.

Question 7

If tax rates are increasing:

Accepted Answer

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

Question 8

If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Accepted Answer

The answer of If Joel earns a 10 percent after-tax...

Question 9

If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s)to three decimal places.)

Accepted Answer

To find the present value of $8,000 received in four years at a 6 percent after-tax rate of return, we use the formula for present value: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value ($8,000), r is the rate (6% or 0.06), and n is the number of periods (4 years). The discount factor for 6% over 4 years can be calculated as 1 / (1 + 0.06)^4 ≈ 0.792. Therefore, the present value is $8,000 * 0.792 = $6,336.

Question 10

If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1. (Round discount factor(s)to five decimal places.)

Accepted Answer

Since Scott earns a 12 percent after-tax rate, it means that he already paid taxes on his initial amount. Therefore, we do not have to consider taxes when calculating future value. We can use the formula for future value of $1:

FV = PV x (1 + r)^n

where PV is the present value, r is the interest rate, and n is the number of periods. In this case, PV is $15,000, r is 12%, and n is 2 years.

FV = $15,000 x (1 + 0.12)^2 = $18,815.52

Therefore, $15,000 today would be worth $18,815.52 to Scott in two years. Rounded to the nearest penny, the answer is $18,816.

Question 11

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

Accepted Answer

To find the future value of $20,000 in five years at an 8 percent after-tax rate of return, we use the future value formula: FV = PV * (1 + r)^n, where PV is the present value ($20,000), r is the rate of return (0.08), and n is the number of years (5). Calculating this gives FV = $20,000 * (1 + 0.08)^5 = $20,000 * 1.4693 = $29,386 (rounded to the nearest dollar, and noting the calculation error in the provided choices). Since none of the provided choices match this calculation, the correct answer is E) None of the choices are correct.

Question 12

If Julius has a 32 percent tax rate and a 10 percent 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 discount factor(s)to three decimal places.)

Accepted Answer

Using Exhibit 3.1, we can find the discount factor for two years at a 10% after-tax rate of return, which is 0.826. The present value of the $40,000 tax deduction is therefore $40,000 x 0.826 = $33,040. The tax savings would be 32% of this amount, which is $10,573.

Question 13

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?

Accepted Answer

As a cash-basis taxpayer, Rolando must report income in the year it is received, available, or constructively received. Since the bonus was available in 2018, he should report it for that year, regardless of when he physically picked up the check.

Question 14

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 because it does not necessarily reflect the taxpayer's current or future tax situation. The other options are all important factors in determining when to realize gains or losses for tax purposes.

Question 15

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 16

If tax rates are decreasing:

Accepted Answer

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

Question 17

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 18

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

Accepted Answer

None of the choices presented limit the benefits of deferring income. Increasing tax rates may lower the net benefit, but it does not eliminate the benefit of deferring income. Severe cash flow needs may require immediate income, but it does not limit the benefits for someone who does not have those needs. Continuing an investment with low returns or unnecessary risk may not be in the taxpayer's best interest, but it still does not limit the potential benefits of deferring income.

Question 19

If Rudy has a 25 percent tax rate and a 6 percent 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 discount factor(s)to three decimal places.)

Accepted Answer

The tax savings from a $30,000 deduction at a 25 percent tax rate is $7,500. To find the present value of this savings in today's dollars, we use the 6 percent after-tax rate of return for four years. The present value factor for 6 percent over four years is approximately 0.792 (this can be found in financial tables or calculated using a financial calculator). Multiplying $7,500 by 0.792 gives us $5,940.

Question 20

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

Accelerating deductions reduces taxable income in the current year, resulting in a smaller tax bill. However, accelerating deductions also decreases the amount of money available for investment, resulting in a smaller after-tax rate of return. Therefore, a smaller after-tax rate of return decreases the benefits of accelerating deductions.

Quiz 3: Tax Planning Strategies and Related Limitations

If Thomas has a 37 percent tax rate and a 6 percent 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 discount factor(s) to three decimal places.)

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 increases the benefits of income deferral?

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

The constructive receipt doctrine:

If Julius has a 22 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

If tax rates are increasing:

If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1. (Round discount factor(s) to five decimal places.)

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

If Julius has a 32 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

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?

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

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

If tax rates are decreasing:

If tax rates are decreasing:

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

If Rudy has a 25 percent tax rate and a 6 percent 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 discount factor(s) to three decimal places.)

Which of the following decreases the benefits of accelerating deductions?