Deck 12: Tax Planning

Question 1

Investing in non-dividend paying stock that is expected to appreciate yearly by 5 percent instead of investing in 5 percent corporate bonds is an example of tax planning by:

A) spreading income through portfolio diversification.
B) avoiding income recognition.
C) changing the timing of recognition of taxable income.
D) changing the character of income

Answer 1

B

Question 2

Tax planning:

A) is a completely legal means for saving taxes.
B) has as its goal tax evasion.
C) endeavors to understate the taxpayer's real wealth.
D) is all of the above.

Answer 2

C

Question 3

Where ATC = after-tax cost, BTC = before-tax cost, and MTR = marginal tax rate, the after-tax cost of tax planning can be expressed as:

A) ATC = BTC x 1-MTR).
B) a factor of the time value of money.
C) MTR x taxable income =ATC.
D) ATC = BTC ÷ 1-MTR).

Answer 3

B

Question 4

The tax rate that is applied on the next dollar of taxable income is referred to as the:

A) marginal tax rate.
B) effective tax rate.
C) before-tax cost.
D) None of the above.

Question 5

Jane owns land adjacent to her home that appreciated in value by $5,000 this year. She acquired the land five years ago for $25,000. Based on these facts alone, the amount that would be included in her taxable income for the current year is:

A) $30,000
B) $25,000
C) $5,000
D) $0

Question 6

Which of the following is the basic formula for computing a taxpayer's tax liability?

A) Tax Liability = Tax Base ÷ Tax Rate
B) Tax Liability = Tax Base x 1 - Tax Rate)
C) Tax Liability = Tax Base x Tax Rate
D) None of the above.

Question 7

Most sales and property taxes in the U.S. employ a:

A) proportional rate structure.
B) regressive rate structure.
C) progressive rate structure.
D) consumption rate structure.

Question 8

Which of the following is true about the Tax Reform Act of 1986?

A) It lowered the top individual income tax rate from 50 percent to 28 percent.
B) It decreased the capital gains rate.
C) It lowered the bottom individual income tax rate from 15 percent to 11 percent.
D) All of the above.

Question 9

Which of the following tax rate systems is applicable to the U.S. individual income tax?

A) Proportional tax rate system.
B) Regressive tax rate system.
C) Progressive tax rate system.
D) None of the above.

Question 10

Which of the following is a feature of a properly accomplished tax planning?

A) It allows the tax professional to exercise a higher degree of creativity.
B) It forces the client to identify financial goals and general means by which to achieve them.
C) It offers a legal way to avoid taxes.
D) All of the above.

Question 11

David Jacob, a salaried person, incurred a loss of $4,000 from passive activities. This loss can be applied as a deduction to offset taxable income from:

A) his salary.
B) his long-term capital gains for the year.
C) passive activities.
D) any source.

Question 12

Taxpayers often can legally reduce their exposure to taxation by:

A) avoiding the accumulation of gross income that must be recognized.
B) deducting federal taxes.
C) not appearing before tax officials.
D) postponing deductions.

Question 13

Choosing tax-free fringe benefits instead of an equivalent hike in salary is an example of tax planning by:

A) accelerating income recognition.
B) changing the timing of recognition of taxable income.
C) avoiding income recognition.
D) All of the above.

Question 14

Allowing an investment to increase in value without selling it is an example of tax planning by:

A) changing the timing of recognition of taxable income.
B) changing the character of income.
C) spreading income among related parties.
D) Only a) and b).

Question 15

Which of the following is the most common tax that is found in contemporary industrialized societies?

A) A tax on consumption.
B) A proportional tax.
C) A tax on income.
D) A property tax.

Question 16

Under a regressive tax rate system, the applicable tax rate:

A) increases as the tax base grows larger.
B) remains unchanged irrespective of the level of tax base.
C) best reflects the capacity of the taxpayer to pay.
D) decreases as the tax base grows larger.

Question 17

7 A proportional tax rate system represents:

A) an increasing tax rate structure.
B) a flat tax rate structure.
C) the U.S. federal income tax system.
D) none of the above.

Question 18

Under a progressive tax rate system, the applicable tax rate:

A) is applied against the taxpayer's net holdings of tangible assets.
B) decreases as the tax base grows larger.
C) increases as the tax base grows larger.
D) is independent of the tax base.

Question 19

The tax rate which is computed by simply dividing the total tax liability by the corresponding tax base is known as the:

A) capital gains tax rate.
B) average tax rate.
C) effective tax rate.
D) marginal tax rate.

Question 20

Which of the following tax law rules create incentives for tax planning?

A) The Federal income tax itself is deductible in determining taxable income.
B) Reducing the amount of income taxes that are paid decreases a taxpayer's allowable deductions.
C) The Federal income tax itself is not allowed as a deduction in determining taxable income.
D) None of the above.

Question 21

Which of the following are the two pervasive judicial doctrines that often limit the taxpayer's ability to employ effective planning techniques?

A) the progressive tax rate requirement and marginal rates.
B) business purpose and substance over form.
C) business purpose and changing tax jurisdiction.
D) All of the above are judicial doctrines that limit effective tax planning.

Question 22

Taxpayers can use the step-transaction doctrine to obtain various tax advantages.

Question 23

Under a proportional tax rate system, the tax rate is constant.

Question 24

With respect to tax planning activities, the decision maker must compare the after-tax benefits with the pre-tax costs.

Question 25

Whenever a series of transactions results in significant tax savings, the IRS may attempt to apply the concept of substance over form by 'telescoping' or 'collapsing' several transactions into one.

Question 26

The progressive nature of the tax system tends to increase the advantage of income splitting.

Question 27

Taxpayers are rewarded more for finding ways to save taxes than for earning an equal amount in the marketplace.

Question 28

For 2010, the amount of exemption that a child can enjoy on any interest, dividends or capital gains income is limited to:

A) $950.
B) $1900.
C) $10,000.
D) There is no exemption for this type of income.

Question 29

The judicial doctrine 'business purpose' can decrease the taxpayer's ability to employ effective planning techniques.

Question 30

With regard to employers, generally, salary payments to employees are deductible but fringe benefit payments are not.

Question 31

Any business-related expenses that are incurred in connection with the determination of a tax are not deductible.

Question 32

What is the age at which children who are not full-time students are no longer subject to the "kiddie" tax?

A) 24
B) 18
C) 19
D) none of the above.

Question 33

The effective tax rate can be found by dividing the total tax liability by the economic income.

Question 34

Investment expenses can offset ordinary income.

Question 35

Tax planning analyses should be based on the average tax rates that the individual will pay or save by adopting a particular course of action.

Question 36

Taxpayers can always minimize their tax liability simply by moving income and assets out of one jurisdiction to another.
Short

Question 37

Spreading income among related taxpayers is one of the goals of tax planning behavior.

Question 38

The 'Kiddie tax' was created to prevent parents from sheltering income by putting accounts in the names of their lower-taxed children.

Question 39

The first requirement for effective tax planning is awareness on the part of decision- makers.

Question 40

When tax rates are constant, delaying income recognition or accelerating deductions can be beneficial.

Question 41

What is a statutory tax trap? Give an example.

Question 42

Robinson is subject to a 40 percent overall marginal tax rate. Is he better off if he receives a tax-free fringe benefit of $4,000 than receiving an equivalent raise in his salary? Why or why not?
Essay Questions

Question 43

Tax planning has been said to offer an opportunity for the most psychologically and financially rewarding work in tax practice. What is it about tax planning that would lead one to his conclusion?