Chapter 3 Taxes

Which of the following statements is correct regarding present value?

$1 today is worth more than $1 in the future

The discount factor for a one-year investment earning a rate of return of 3 percent is equal to Blank (Your answer should be a number rounded to three decimal places).

1(1+0.3)=0.971

Calculate the discount factor for one period for an investment given a rate of return equal to 6 percent.

1/(1 +.06) = 0.943

Darlene plans to purchase $3,000 in furniture for her office. She is currently in the 20% tax bracket, so her after tax cost of the furniture is $Blank if she purchases it in the current year. She expects her marginal rate will increase to 25% next year. If she waits until next year to purchase the furniture and her after tax rate of return is 7%, the after-tax cost of her furniture will be $Blank

2,400; 2,299 Present: $3,000 x 0.20 = 600; 3,000 - 600 = 2,400 Next Year: $3,000 x 0.25 = 750 x 0.935 (PV) = 701; 3,000 - 701 = 2,299

Nina can choose to receive $5,000 today or $5,000 a year from now. If she takes the money now and invests the money at a 6% interest rate (after tax), she will have $ one year from now.

5,300

Which one of the following statements is CORRECT regarding the timing strategy?

It is best to recognize deductions in high-tax-rate years and income in low-tax-rate years.

Which of the following are tax planning methods used in income shifting strategies?

Moving income and deductions from taxpayers in one rate bracket to taxpayers in a different rate bracket Moving income and deductions to more tax favorable jurisdictions

Which one of the following choices describes an income shifting tax planning strategy?

Moving income to more tax favorable jurisdictions

Which of the following options are limitations of a timing strategy? (Choose all that apply.)

Tax laws generally require taxpayers to continue their investment in an asset in order to defer income recognition. The constructive receipt doctrine often prevents income from being deferred to a later period.

Which of the following statements are CORRECT? (Choose all that apply.)

Taxpayers prefer higher present values when considering cash inflows. Taxpayers prefer lower present values when considering cash outflows.

Which of the following statements is INCORRECT regarding income shifting strategies across jurisdictions?

Taxpayers that operate in multiple countries should always incorporate in the country with the lowest tax structure in order to pay taxes in that country. Reason: This answer is incorrect because there are often implicit taxes or costs associated with low-tax areas. All factors and costs should be examined to determine if it is the best location.

Danny is trying to determine if he should purchase equipment for his business this year or next year. He is currently in the 28% tax bracket and will be able to expense the equipment in the year he purchases it. With the new equipment, he believes that his marginal rate will increase to 33% next year. The cost of the equipment is $20,000 and his after-tax rate of return is 6%. Calculate the after-tax cost of the equipment for both years and choose the correct statement below.

The after tax cost of the equipment is $14,400 this year or $13,776 next year. Danny should purchase the equipment next year.

How should a taxpayer evaluate whether it is advantageous to accelerate a tax deduction in a period of tax rate increases?

The taxpayer needs to compare the tax-savings from the deduction in the current year to the present value of the tax-savings in one year.

Under what circumstances might a taxpayer want to defer the recognition of income? (Check all that apply.)

When setting aside money for retirement When the actual receipt of the income does not have to be postponed very long

Under which of the following situations is a strategy for the timing of deductions most beneficial? (Check all that apply.)

When the transaction is large When tax rates are high When the taxpayer is earning a high rate of return When tax deductions can be accelerated without accelerating the cash outflow

Andy is considering investing $5,000 into one of three investments. He can invest in corporate stock that will pay dividends of 5% per year. He can purchase corporate bonds that pay 6%. Or, he can invest in tax-exempt securities that will pay 4% per year. Andy is in the 33% marginal tax bracket and the dividends will be taxed at 15%. Match the investment to its respective after-tax return.

a. i ($5,000 x 0.05 x (1-0.15)) b. ii ($5,000 x 0.06 x (1-0.33) c. iii ($5,000 x 0.04)

When tax rates are decreasing, taxpayers should Blank tax deductions and Blank taxable income.

accelerate and defer

When tax rates are constant, taxpayers should ______ tax deductions and ______ recognizing taxable income.

accelerate and then defer

Because it often restricts the income deferral for cash-method taxpayers, the doctrine is a limitation of a timing strategy

constructive receipts

Andy is considering investing $5,000 into one of three investments. He can invest in corporate stock that will pay dividends of 5% per year. He can purchase corporate bonds that pay 6%. Or, he can invest in tax-exempt securities that will pay 4% per year. Andy is in the 33% marginal tax bracket and the dividends will be taxed at 15%. Based on his after-tax return, which investment should he choose?

corporate bond

When tax rates are constant or ______, taxpayers should accelerate tax deductions and defer taxable income.

decreasing

An effective income shifting strategy for a corporation and an employee-owner involves generating a tax for one party while generating taxable for the other party.

deduction and income

In addition to accelerating deductions, the timing strategy of ______ income recognition is beneficial to many taxpayers.

deferring

When tax rates are constant, tax planning suggests that taxpayers should consider Blank the recognition of income.

deferring

When considering cash inflows, taxpayers and planners prefer present values that are Blank(higher/lower) than the future value. When considering cash outflows, taxpayers and planners prefer present values that are Blank (higher/lower) than the future value.

inflows=tax generated from deductions-saved outflows=taxes paid

Most important considerations for effective tax planning for an individual

maximize after tax wealth and meet non tax related goals

Which of the following methods will NOT result in a tax beneficial shift of income from a corporation to its employee-owner?

paying dividends to employee-owner

The impact of the tax rate on a transaction must be considered along with the Blank , 2Blank of the transaction to determine if the benefits of accelerating the transaction outweigh the disadvantages.

present value

not three basic tax strategies

tax minimization

What is the present value today of $2,300 received two years from now with a rate of return equal to 4%?

times by chart number given under %