Question 1

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. (Rounddiscount factor(s)to three decimal places.)

Accepted Answer

First, we need to find the present value of the $25,000 income in three years using the formula: 
PV = FV / (1+r)^n 
where PV is the present value, FV is the future value, r is the after-tax rate of return, and n is the number of years.

PV = $25,000 / (1+0.10)^3 = $18,694.27

Next, we need to find the amount of tax that Julius will pay using the formula: 
tax = (income - PV) x tax rate 
where income is the future income, PV is the present value, and tax rate is the tax rate.

tax = ($25,000 - $18,694.27) x 0.22 = $1,418.69

Finally, we need to find the present value of the tax using the discount factor from Exhibit 3.1. The discount factor for three years and 22% is 0.761.

Present value of tax = $1,418.69 x 0.761 = $1,079.02

Therefore, the cost of the tax in today's dollars is $1,079.02, which is closest to answer A ($4,131).

Question 2

If Thomas has a 37 percent tax rate and a 12 percent after-tax rate of return, $74,000 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

To find the tax cost in today's dollars, calculate the tax on $74,000 at a 37% rate, which is $27,380. Then, discount this tax amount back to present value using the 12% after-tax rate of return over five years. The discount factor for 12% over five years is approximately 0.567. Thus, $27,380 * 0.567 = $15,524.

Question 3

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 4

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

Accelerating deductions reduces taxes in the current period, but it also means less deductions in future periods, leading to a smaller after-tax rate of return. Therefore, a smaller after-tax rate of return decreases the benefits of accelerating deductions. Accelerating deductions means you can deduct expenses sooner, thus reducing your taxable income and potentially lowering your tax liability. However, if the after-tax rate of return is smaller (meaning the investment is not earning as much), then the benefits of accelerating deductions will also be smaller.

Question 5

If Nicolai earns an 7 percent after-tax rate of return, $16,000 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, use the formula FV = PV * (1 + r)^n, where PV is the present value ($16,000), r is the rate of return (0.07), and n is the number of years (5). Calculating this gives FV = $16,000 * (1.07)^5 = $22,446.57, which is not listed among the choices.

Question 6

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 7

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

To calculate the future value, we need to use the formula:

FV = PV x (1 + r) ^ n

where:

FV = future value
PV = present value = $15,000
r = rate of return = 12% after-tax rate of return = 0.12/ (1-0.2) = 0.15 (assuming a 20% tax rate)
n = number of years = 2

Plugging in the values:

FV = $15,000 x (1 + 0.15) ^ 2 = $18,816

So, $15,000 today would be worth $18,816 to Scott in two years, assuming a 12% after-tax rate of return. Therefore, the best choice is D. First, we need to calculate the discount factor for a 12% after-tax rate of return for two years:
Discount factor = 1/(1+0.12/1)^2 = 0.79718 (rounded to five decimal places)
Next, we can use the future value formula:
Future value = Present value x Discount factor
Future value = $15,000 x 0.79718 = $11,885.70 (rounded to the nearest cent)
Therefore, the value of $15,000 to Scott in two years with a 12% after-tax rate of return is $11,885.70. The closest answer choice is D) $18,816, but this is not the correct answer as it implies a future value greater than the present value, which is not possible.

Question 8

If Lucy earns a 9 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, use the formula PV = FV / (1 + r)^n. Here, FV = $8,000, r = 0.09, and n = 4. The present value is $8,000 / (1.09)^4 = $5,664.

Question 9

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 10

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

Using Exhibit 3.1, we can find the discount factor for a 2-year time period with a 10% after-tax rate of return, which is 0.826. Then, we can calculate the present value of $10,000 received in two years as:

PV = $10,000 ÷ (1 + 10%)² x 0.826 = $8,260 (rounded to the nearest dollar)

Therefore, the correct answer is C) $8,260.

Question 11

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 12

If Julius has a 32 percent tax rate and a 12 percent after-tax rate of return, a $58,000 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

First, we need to calculate the present value of the tax deduction in two years using the discount rate table in Exhibit 3.1. With a 32% tax rate, the discount factor for 2 years is 0.660. Therefore, the present value of the $58,000 tax deduction is:

$58,000 x 0.660 = $38,280

Next, we can calculate how much tax savings this present value represents. Since Julius has a 32% tax rate, the tax saving is:

$38,280 x 0.32 = $12,241.60

Finally, we need to convert this future tax saving to today's dollars using the after-tax rate of return. With a 12% after-tax rate of return, the discount factor for 2 years is 0.864. Therefore, the tax savings in today's dollars is:

$12,241.60 x 0.864 = $10,592.38

So, the answer is B) $14,792.

Question 13

Which of the following increases the benefits of income deferral?

Accepted Answer

A larger after-tax rate of return means that more money will be earned on the deferred income, increasing the total benefit. A smaller after-tax rate of return would decrease the benefit of income deferral. Increasing tax rates would also decrease the benefit, as it would mean a higher tax payment when the income is eventually received. The magnitude of transactions is not directly related to the benefit of income deferral. The benefits of income deferral are increased by having a larger after-tax rate of return. This is because the money being deferred is generating a higher return, which results in more money being available in the future when taxes are paid and the deferred income is received. A smaller after-tax rate of return would decrease the benefits of income deferral. Increasing tax rates and minimizing the magnitude of transactions could have an impact on the total taxation, but it doesn't necessarily increase the benefits of income deferral.

Question 14

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 15

If Joel earns a 6 percent after-tax rate of return, $5,000 received in two 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 $5,000 received in two years with a 6% discount rate, use the formula: PV = FV / (1 + r)^n. Here, FV = $5,000, r = 0.06, and n = 2. PV = $5,000 / (1.06)^2 = $4,450.

Question 16

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 17

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 find the discount factor for two years at a 10 percent after-tax rate of return to be 0.826. Therefore, the present value of the $40,000 tax deduction is $40,000 x 0.826 = $33,040. The amount of tax saved in today's dollars is equal to the tax deduction multiplied by the tax rate, which is $33,040 x 0.32 = $10,573. To calculate the present value of the tax savings, we need to find the present value of the tax deduction. According to Exhibit 3.1, the discount factor for two years at a 10% discount rate is 0.826. Therefore, the present value of the $40,000 tax deduction is:

Present Value = $40,000 x 0.826 = $33,040

The tax savings is simply the present value of the tax deduction multiplied by the tax rate, which is:

Tax Savings = $33,040 x 0.32 = $10,573

Therefore, the answer is B) $10,573.

Question 18

If Julius has a 22 percent tax rate and a 8 percent after-tax rate of return, $55,000 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

First, we need to find the present value of $55,000 in three years using the formula:

Present Value = Future Value / (1 + Discount Rate)^n

Using Exhibit 3.1, we find the discount factor for three years and 8% after-tax rate of return to be 0.7938.

Present Value = $55,000 / (1 + 0.08)^3 = $39,246.67

Next, we need to calculate how much pre-tax income Julius needs to earn in three years to have $55,000 after taxes.

$55,000 = Pre-tax Income * (1 - 0.22)

Pre-tax Income = $70,512.82

Therefore, Julius will pay taxes on $70,512.82 - $55,000 = $15,512.82 of income.

To find the present value of these taxes, we use the same formula:

Present Value = $15,512.82 / (1 + 0.08)^3 = $10,838.14

However, this is not the answer. We need to adjust for the fact that the taxes are paid in three years rather than today.

Using Exhibit 3.1, we find the discount factor for three years and a 22% tax rate to be 0.6840.

Adjusted Present Value of Taxes = $10,838.14 * 0.6840 = $7,412.68

Therefore, the cost of taxes in today's dollars is $7,412.68 or approximately $9,607 when rounded to the nearest dollar. Choice A is the best answer.

Question 19

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 the taxpayer has not yet physically received the income. This doctrine typically applies to cash-basis taxpayers, but can also affect accrual-basis taxpayers in certain situations. It does not apply to expenses. The constructive receipt doctrine causes income to be recognized before it is actually received. This means that if an individual has the ability to control when they receive income, they cannot delay recognition in order to postpone paying taxes on that income. This doctrine applies to both cash and non-cash income.

Question 20

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, 2019, and doesn't pick up his check until January 2, 2020. When should Rolando report his bonus?

Accepted Answer

As a cash-basis taxpayer, Rolando reports income in the year he receives payment. Even if he doesn't pick up his bonus check until the next year, he still earned it in 2019 and should report it on his 2019 tax return. Waiting until 2020 to report the income would be incorrect and could result in penalties from the IRS. Therefore, the best choice is B.

Quiz 3: Tax Planning Strategies and Related Limitations

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. (Rounddiscount factor(s) to three decimal places.)

If Thomas has a 37 percent tax rate and a 12 percent after-tax rate of return, $74,000 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 decreases the benefits of accelerating deductions?

If Nicolai earns an 7 percent after-tax rate of return, $16,000 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 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 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 Lucy earns a 9 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 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.)

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 Julius has a 32 percent tax rate and a 12 percent after-tax rate of return, a $58,000 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.)

Which of the following increases the benefits of income deferral?

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

If Joel earns a 6 percent after-tax rate of return, $5,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

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 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.)

If Julius has a 22 percent tax rate and a 8 percent after-tax rate of return, $55,000 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.)

The constructive receipt doctrine:

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, 2019, and doesn't pick up his check until January 2, 2020. When should Rolando report his bonus?