Tax Planning Strategies and Related Limitations

(1)
[LO2 PLANNING] Yong recently
paid his accountant $10,000 for elaborate tax planning strategies that exploit
the timing strategy. Assuming this is an
election year and there could be a power shift in the White House and Congress,
what is a potential risk associated with Yong’s strategies?

(2)
[LO2, LO3 PLANNING] Billups, a
physician and cash-method taxpayer, is new to the concept of tax planning and
recently learned of the timing strategy.
To implement the timing strategy, Billups plans to establish a new
policy that allows all his clients to wait two years to pay their co-pays. Assume that Billups does not expect his
marginal tax rates to change. What is
wrong with his strategy?

[LO2, LO3 PLANNING] Tesha works for a company that pays a year-end bonus in
January of each year (instead of December of the preceding year) to allow
employees to defer the bonus income.
Assume Congress recently passed tax legislation that decreases
individual tax rates as of next year.
Does this increase or decrease the benefits of the bonus deferral this
year? What if Congress passed legislation
that increased tax rates next year?
Should Tesha ask the company to change its policy this year? What additional information do you need to
answer this question?

(3)
[LO2, LO3 PLANNING] Isabel, a
calendar-year taxpayer, uses the cash method of accounting for her sole
proprietorship. In late December she
received a $20,000 bill from her accountant for consulting services related to
her small business. Isabel can pay the
$20,000 bill anytime before January 30 of next year without penalty. Assume her marginal tax rate is 40 percent
this year and next year, and that she can earn an after-tax rate of return of
12 percent on her investments. When
should she pay the $20,000 bill—this
year or next?

(4)
[LO2, LO3 PLANNING] Using the
facts from the previous problem, how would your answer change if Isabel’s
after-tax rate of return were 8 percent?

(5)
[LO2,LO3 PLANNING] Manny, a
calendar-year taxpayer, uses the cash method of accounting for his sole
proprietorship. In late December he
performed $20,000 of legal services for a client. Manny typically requires his clients to pay
his bills immediately upon receipt.
Assume Manny’s marginal tax rate is 40 percent this year and next year,
and that he can earn an after-tax rate of return of 12 percent on his
investments. Should Manny send his
client the bill in December or January?

(6)
[LO2,LO3 PLANNING] Using the
facts from the previous problem, how would your answer change if Manny’s
after-tax rate of return were 8 percent?

[LO2, LO3 PLANNING] Reese, a calendar-year taxpayer, uses the cash method of
accounting for her sole proprietorship.
In late December she received a $20,000 bill from her accountant for
consulting services related to her small business. Reese can pay the $20,000 bill any time
before January 30 of next year without penalty.
Assume Reese’s marginal tax rate is 30 percent this year and will be 40
percent next year, and that she can earn an after-tax rate of return of 12
percent on her investments. When should
she pay the $20,000 bill—this year
or next?

(7)
[LO2, LO3 PLANNING] Using the
facts from the previous problem, when should Reese pay the bill if she expects
her marginal tax rate to be 33 percent next year? 25 percent next year?

(8)
[LO2, LO3 PLANNING] Hank, a calendar-year
taxpayer, uses the cash method of accounting for his sole proprietorship. In late December he performed $20,000 of
legal services for a client. Hank
typically requires his clients to pay his bills immediately upon receipt. Assume his marginal tax rate is 30 percent
this year and will be 40 percent next year, and that he can earn an after-tax
rate of return of 12 percent on his investments. Should Hank send his client the bill in
December or January?

[LO2, LO3 PLANNING] Using the facts from the previous problem, when should Hank
send the bill if he expect his marginal tax rate to be 33 percent next year? 25
percent next year?

(9)
[LO3] Geraldo recently won a
lottery and chose to receive $100,000 today instead of an equivalent amount in
ten years, computed using an 8 percent rate of return. Today, he learned that interest rates are
expected to increase in the future. Is
this good news for Geraldo given his decision?

(10)
[LO3 PLANNING] Assume Rafael
can earn an 8 percent after-tax rate of return. Would he prefer $1,000 today or $1,500 in five
years?

[LO3 PLANNING] Assume Ellina earns a 10 percent
after-tax rate of return, and that she owes a friend $1,200. Would she prefer to pay the friend $1,200
today or $1,750 in four years?