ACCT 401 - Chapter 3

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

$2,127.50

Lucky Lee has won a contest where he can choose to receive $500 today or $550 one year from now. Assuming his rate of return is 5%, how much is the $550 worth today?

$523.60 Reason: $550 x 0.952 = $523.60

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

0.943 Reason: 1/(1 +.06) = 0.943

Which of the following statements is correct regarding present value?

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

Which of the following taxpayers would likely benefit LEAST from an income shifting strategy?

A taxpayer with a business that operates in one state

Select the two most important considerations that are necessary for effective tax planning for individuals.

Achieving non-tax related goals Maximizing after-tax wealth

The discount factor for a one-year investment earning a rate of return of 3 percent is equal to (Enter your answer as a decimal rounded to three decimal places).

Blank 1: .971 or 0.971

Andre has the option of receiving $1,800 today or $1,860 a year from now. Assuming Andre can invest the money and earn 4 percent this year, he would have $ a year from now. He should take the $ (1,800/1,860). (The answers should be in the form of amounts rather than words.)

Blank 1: 1,872 or 1872 Blank 2: 1,800 or 1800

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 $ 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 $. (Round your answers to the nearest whole dollar.)

Blank 1: 2,400 or 2400 Blank 2: 2,299, 2299, 2,300, or 2300

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. (The answer should be in the form of amounts rather than words.)

Blank 1: 5,300 or 5300

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

Blank 1: accelerate or accelerating Blank 2: defer, postpone, or deferring

In order for a related-party transaction to be acceptable to the IRS, it should be structured as a(n) transaction.

Blank 1: arm's, arms, arm, or arms' Blank 2: length

is the legal act of arranging one's transactions to minimize taxes paid. Tax is the willful act of defrauding the government by NOT paying taxes legally owed.

Blank 1: avoidance Blank 2: evasion

The tax planning strategy based on the understanding that the tax law does NOT treat all types of income and deductions the same is the strategy.

Blank 1: conversion

strategy is based on the understanding that the tax law does not treat all types of income and deductions the same.

Blank 1: conversion

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.

Blank 1: deduction, deductions, or deductible Blank 2: income

All other things being equal, taxpayers should prefer to recognize during high-tax-rate years and during low-tax-rate years. (Enter either deductions or income in each blank.)

Blank 1: deductions, expenses, deduction, or expense Blank 2: income, revenue, or revenues

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

Blank 1: deferring, postponing, delaying, or defer

A lower rate of return on tax-exempt securities than the rate earned on similar taxable securities is an example of a(n) tax which often reduces or negates the benefits of conversion strategies.

Blank 1: implicit

A $1 today is worth than $1 in the future.

Blank 1: more

The impact of the tax rate on a transaction must be considered along with the of the transaction to determine if the benefits of accelerating the transaction outweigh the disadvantages. (Enter only one word per blank.)

Blank 1: present Blank 2: value

Generally, whenever a taxpayer can accelerate a tax deduction without accelerating the cash outflow, the strategy will be beneficial.

Blank 1: timing or time

There are three basic tax planning strategies that represent the building blocks of tax planning. These strategies include , income shifting, and .

Blank 1: timing or time Blank 2: conversion

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 stock

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. Instructions

Corporate stock matches Choice, $212.50 $212.50 Corporate bonds matches Choice, $201.00 $201.00 Tax-exempt securities matches Choice, $200.00 $200.00

Andrew received 20 percent of his business revenue in cash. The cash was not third-party reported to the IRS. Andrew has decided NOT to report the cash receipts on his tax return. Which response is true?

Failure to report the income is considered tax evasion.

True or false: Neither tax avoidance nor tax evasion is acceptable or legal in the U.S.

False

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 is NOT necessarily a part of effective tax planning?

Minimizing tax payments

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

Moving income to more tax favorable jurisdictions

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 the employee-owner

Which of the following doctrines is NOT used by the IRS to examine transactions where it expects taxpayer abuse?

Tax minimization doctrine

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.

The taxpayers who are MOST likely to benefit from an income shifting strategy include which of the following choices?

Taxpayers who have related parties with varying marginal tax rates or who operate in multiple jurisdictions with different marginal tax rates

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. Reason: The present value of the $6,600 tax savings should be calculated.

Which of the following choices is an advantage of shifting income across jurisdictions?

The differences in tax rates and tax laws across jurisdictions can often be used to maximize after-tax wealth.

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.

Which of the following options best describes the basis for conversion strategies?

The understanding that the tax law does not treat all types of income and deductions the same

Which of the following taxpayers is using an income shifting tax planning strategy?

Tori (33% marginal tax rate) gave several of her investments to her daughter so that the income will be taxed at the daughter's lower tax rate.

Which of the following transactions would NOT be acceptable to the IRS as a means of switching the taxable income to another taxpayer?

Transferring interest income from a taxpayer's investment to his young daughter

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

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 When the transaction is large

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

accelerate; defer

What is the name of the tax rule that requires income to be taxed to the taxpayer who actually earns it?

assignment of income doctrine

Limitations on certain tax benefits, such as depreciation for luxury automobiles, often decrease or eliminate the benefits of ______ strategies.

conversion

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

decreasing

The concept that $1 today is worth more than $1 in the future is known as:

present value