Question 1

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, if the after-tax rate of return on the funds spent to accelerate those deductions is lower than the rate of return that could be earned if those funds were invested, the benefits of accelerating deductions will be decreased.

Question 2

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

Accepted Answer

Timing tax planning strategy is based on present value of money. This strategy involves timing the receipt or payment of income or expenses to maximize tax savings by considering the time value of money.

Question 3

The constructive receipt doctrine:

Accepted Answer

The constructive receipt doctrine causes income to be recognized before it is actually received. This means that if a taxpayer has the right to receive income but chooses not to, the income is still considered received for tax purposes. This doctrine is particularly important for cash basis taxpayers because they recognize income and expenses when cash is actually received or paid.

Question 4

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 5

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 6

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 7

If tax rates are decreasing:

Accepted Answer

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

Question 8

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 as it pertains to the past and not future tax implications. The other factors listed (after-tax rate of return, current and future tax rates) are important considerations in determining the optimal timing for various tax-related decisions.

Question 9

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.

Question 10

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 11

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 12

If tax rates are increasing:

Accepted Answer

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

Question 13

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 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

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

Question 15

Which of the following increases the benefits of income deferral?

Accepted Answer

Income deferral involves delaying the payment of taxes on income until a later date. The benefit of income deferral is that the funds that would have been paid in taxes can be invested and earn a return. Therefore, a larger after-tax rate of return would increase the benefits of income deferral by allowing the funds to grow more quickly. Increasing tax rates would decrease the benefits of income deferral. Smaller after-tax rate of return and smaller magnitude of transactions are not relevant to the benefits of income deferral.

Question 16

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 17

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

Since Rolando is a cash basis taxpayer, he must report income in the year it is received. By leaving town and not picking up his bonus until January 2, 2018, the bonus is not considered received until 2018, even if it was earned in 2017. Therefore, the bonus should be reported as income in 2018.

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

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

Question 19

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

Accepted Answer

None of the choices limit the benefits of deferring income.

Question 20

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.

Quiz 3: Tax Planning Strategies and Related Limitations

Which of the following decreases the benefits of accelerating deductions?

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

The constructive receipt doctrine:

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)

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:

If tax rates are decreasing:

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

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)

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.)

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

If tax rates are increasing:

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 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 increases the benefits of income deferral?

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)

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 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)

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

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?