Question 1

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? (round present and future value amounts to 3 places)

Accepted Answer

$50,000 × .40 (tax rate) × .747 (Discount Factor, 6%, 5 years) = $14,940.

Question 2

Which of the following decreases the benefits of accelerating deductions?

Accepted Answer

Accelerating deductions is beneficial when the taxpayer expects a higher tax rate in the future. However, if the tax rates decrease, accelerating deductions will cause the taxpayer to lose out on the potential tax savings in the future. Smaller after-tax rate of return means that the taxpayer has less cash available to invest, which decreases the potential benefit of accelerated deductions. Larger after-tax rate of return would increase the benefit of accelerated deductions. Magnitude of transactions is not relevant to the benefits of accelerating deductions.

Question 3

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

Accepted Answer

The answer of Assuming a positive interest rate, the present...

Question 4

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, 2016 and doesn't pick up his check until January 2, 2017. When should Rolando report his bonus?

Accepted Answer

As a cash basis taxpayer, Rolando must report income when it is made available to him, regardless of when he actually picks it up. Since the bonus was available on December 31, 2016, he must report it for the year 2016.

Question 5

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? (round present and future value amounts to 3 places)

Accepted Answer

To find the future value, we can use the formula:
Future Value = Present Value x (1+r)^n

where r is the after-tax rate of return and n is the number of years.

In this case, r = 0.12 and n = 2.

So, Future Value = $15,000 x (1+0.12)^2 = $18,816.

Therefore, the answer is D, $18,816.

Question 6

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? (round present and future value amounts to 3 places)

Accepted Answer

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

Question 7

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

Accepted Answer

$10,000 × .826 (Discount Factor, 2 years, 10%) = $8,260.

Question 8

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? (round present and future value amounts to 3 places)

Accepted Answer

First, we need to calculate the amount of tax savings in the future by using present value calculation. 
Future value of tax deduction = $40,000 
Time period = 2 years 
After-tax rate of return = 10% 
PV factor at 10% for 2 years = 0.8264 
Present value of tax deduction = Future value / PV factor = $40,000 / 0.8264 = $48,406.78

Next, we can calculate the amount of tax savings in today’s dollars by multiplying the present value of tax deduction by the tax rate. 
Tax savings = Present value of tax deduction x Tax rate = $48,406.78 x 30% = $14,522.03 
Therefore, the answer is B) $9,912. (rounded to the nearest dollar)

Question 9

If tax rates are decreasing:

Accepted Answer

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

Question 10

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? (round present and future value amounts to 3 places)

Accepted Answer

To find out how much tax Julius will have to pay in today's dollars, we first need to calculate the future value (FV) of his $25,000 income in three years. Using the formula FV = PV x (1 + r)n, where PV is the present value, r is the rate of return, and n is the number of years, we get:

FV = $25,000 x (1 + 0.1)3
FV = $32,765

Next, we need to calculate the present value (PV) of the tax he will have to pay. Since his tax rate is 20%, we can calculate the amount of tax as:

Tax = $25,000 x 0.2
Tax = $5,000

Finally, we need to calculate the present value of the tax using the formula PV = FV / (1 + r)n, where r is the discount rate. The discount rate is the rate at which we want to bring future cash flows back to today's dollars. In this case, we can use the after-tax rate of return as the discount rate, since that is the return Julius would have earned on the money if he didn't have to pay taxes. Using a calculator, we get:

PV = $5,000 / (1 + 0.1)3
PV = $3,754.62

So the answer is A: $3,755.

Question 11

If tax rates are increasing:

Accepted Answer

The answer of If tax rates are increasing:
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Question 12

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 13

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 as it is a historical data point and does not affect future decision-making. The other options, such as the after-tax rate of return and tax rates in current and future years, are important factors in determining the most advantageous timing strategy.

Question 14

If tax rates are decreasing:

Accepted Answer

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

Question 15

If Lucy earns a 6% after-tax rate of return, $8,000 received in four years is worth how much today? (round present and future value amounts to 3 places)

Accepted Answer

$8,000 × .792 (Discount Factor, 4 years, 6%) = $6,336.

Question 16

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

Accepted Answer

The answer of Which of the following does not limit...

Question 17

The constructive receipt doctrine:

Accepted Answer

The constructive receipt doctrine states that income must be recognized when it is made available to the taxpayer, even if it has not yet been physically received. This means that even if a taxpayer has not yet received payment, if they have the ability to obtain it, it must be recognized as income. This can be particularly restrictive for accrual basis taxpayers who can recognize income before it is actually received, as they may not have control over when they receive payment.

Question 18

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? (round present and future value amounts to 3 places)

Accepted Answer

$30,000 × .25 (tax rate) × .792 (Discount Factor, 6%, 4 years) = $5,940.

Question 19

Which of the following increases the benefits of income deferral?

Accepted Answer

Income deferral involves delaying the payment of taxes on current income until a later time. The benefits of income deferral increase when the after-tax rate of return on the deferred income is larger. This is because the deferred income will have more time to grow and earn returns, resulting in a larger amount of income at the time of withdrawal or distribution. Increasing tax rates would have the opposite effect, decreasing the benefits of income deferral. The magnitude of transactions and the after-tax rate of return are also important factors to consider, but of these options, only C would increase the benefits of income deferral.

Question 20

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

Accepted Answer

Timing is a tax planning strategy that is based on the present value of money. By timing the receipt or payment of income or expenses, a taxpayer can take advantage of the time value of money and reduce their overall tax liability. For example, if a taxpayer expects their income to be higher in the coming year, they may choose to delay the receipt of bonus income until the following year to avoid being pushed into a higher tax bracket.

Quiz 3: Tax Planning Strategies and Related Limitations

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? (round present and future value amounts to 3 places)

Which of the following decreases the benefits of accelerating deductions?

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

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, 2016 and doesn't pick up his check until January 2, 2017. When should Rolando report his bonus?

If Scott earns a 12% after-tax rate of return, $15,000 today would be worth how much to Scott in 2 years? (round present and future value amounts to 3 places)

If Nicolai earns an 8% after-tax rate of return, $20,000 today would be worth how much to Nicolai in 5 years? (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? (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? (round present and future value amounts to 3 places)

If tax rates are decreasing:

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? (round present and future value amounts to 3 places)

If tax rates are increasing:

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 is not required to determine the best timing strategy?

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? (round present and future value amounts to 3 places)

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

The constructive receipt doctrine:

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? (round present and future value amounts to 3 places)

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?