Ch3 Test Questions & Answers + Tax Planning Strategies And

Taxation of Individuals, 11e (Spilker)

Chapter 3 Tax Planning Strategies and Related Limitations

1) The goal of tax planning is tax minimization.

2) Nontax factors do not play an important role in tax planning.

3) Virtually every transaction involves the taxpayer and two other parties that have an interest in the tax ramifications of the transaction.

4) The timing strategy is based on the idea that the location of where the income is taxed affects the tax costs of the income.

5) In general, tax planners prefer to accelerate deductions.

6) The concept of present value is an important part of the timing strategy.

7) Assuming an after-tax rate of return of 10 percent, John should prefer to pay an expense of $85 today instead of an expense of $100 in one year. Use Exhibit 3.1.

8) The time value of money suggests that $1 one year from now is worth less than $1 today.

9) The present value concept becomes more important as interest rates increase.

10) Future value can be computed as Future Value = Present Value/(1 + r)n.

11) When considering cash inflows, higher present values are preferred.

12) When considering cash outflows, higher present values are preferred.

13) Tax savings generated from deductions are considered cash inflows.

14) In general, tax planners prefer to defer income. This is an example of the conversion strategy.

15) The timing strategy is particularly effective for cash-basis taxpayers.

16) The timing strategy becomes more attractive as tax rates decrease.

17) The timing strategy becomes more attractive as interest rates (i.e., rates of return) increase.

18) The timing strategy becomes more attractive if a taxpayer is able to accelerate deductions by two or more years (versus one year).

19) One limitation of the timing strategy is the difficulties in accelerating a tax deduction without accelerating the actual cash outflow that generates the tax deduction.

20) The constructive receipt doctrine is a natural limitation for the conversion strategy.

21) The constructive receipt doctrine is more of an issue for cash-basis taxpayers.

22) If tax rates will be higher next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

23) If tax rates will be lower next year, taxpayers should accelerate their deductions regardless of their after-tax rate of return.

24) If tax rates will be higher next year, taxpayers should defer their income to next year regardless of their after-tax rate of return.

25) The value of a tax deduction is higher for a taxpayer with a lower tax rate.

26) The income-shifting strategy requires taxpayers with varying tax rates.

27) The assignment of income doctrine is a natural limitation to the timing strategy.

28) The business purpose, step-transaction, and substance-over-form doctrines may limit the income-shifting strategy.

29) Paying dividends to shareholders is one effective way of shifting income from a corporation to its shareholders.

30) The conversion strategy capitalizes on the fact that tax rates vary across different activities.

31) An investment's time horizon does not affect after-tax rates of return on investments taxed annually.

32) Implicit taxes may reduce the benefits of the conversion strategy.

33) Investors must consider complicit taxes as well as explicit taxes in order to make correct investment choices.

34) The business purpose, step-transaction, and substance-over-form doctrines may limit the conversion strategy.

35) Tax avoidance is a legal activity that forms the basis of the basic tax planning strategies.

36) Tax evasion is a legal activity that forms the basis of the basic tax planning strategies.

37) The downside of tax avoidance includes the potential of stiff monetary penalties and imprisonment.

38) The goal of tax planning generally is to:

A) minimize taxes.

B) minimize IRS scrutiny.

C) maximize after-tax wealth.

D) support the federal government.

E) None of the choices are correct.

39) Effective tax planning requires all of these considerations except:

A) nontax factors.

B) the taxpayer's tax costs of alternative transactions.

C) the other party's tax costs of alternative transactions.

D) the other party's nontax costs of alternative transactions.

E) all of the choices are required considerations.

40) Which is not a basic tax planning strategy?

A) Income shifting.

B) Timing.

C) Conversion.

D) Arm's length transaction.

E) None of the choices are correct.

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

A) timing.

B) tax avoidance.

C) income shifting.

D) conversion.

E) None of the choices are correct.

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

A) $1 today = $1 in one year.

B) $1 today > $1 in one year.

C) $1 today < $1 in one year.

D) $1 today ≤ $1 in one year.

E) None of the choices are correct.

43) If Joel earns a 10 percent after-tax rate of return, $10,000 received in two years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

A) $10,000.

B) $9,090.

C) $8,260.

D) $11,000.

E) None of the choices are correct.

44) If Lucy earns a 6 percent after-tax rate of return, $8,000 received in four years is worth how much today? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.) 

A) $8,000.

B) $7,544.

C) $8,989.

D) $6,336.

E) None of the choices are correct.

45) If Nicolai earns an 8 percent after-tax rate of return, $20,000 today would be worth how much to Nicolai in five years? Use future value of $1. (Round discount factor(s) to four decimal places.) 

A) $20,000.

B) $13,620.

C) $18,520.

D) $21,600.

E) None of the choices are correct.

46) If Scott earns a 12 percent after-tax rate of return, $15,000 today would be worth how much to Scott in two years? Use future value of $1. (Round discount factor(s) to five decimal places.)

A) $15,000.

B) $11,955.

C) $18,520.

D) $18,816.

E) None of the choices are correct.

47) If Rudy has a 25 percent tax rate and a 6 percent 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 discount factor(s) to three decimal places.)

A) $30,000.

B) $7,500.

C) $23,760.

D) $5,940.

E) None of the choices are correct.

48) 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?

A) 1 year.

B) 5 years.

C) 10 years.

D) 20 years.

E) All yield the same after-tax return.

49) If Julius has a 32 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

A) $40,000.

B) $10,573.

C) $33,040.

D) $12,800.

E) None of the choices are correct.

50) If Thomas has a 37 percent tax rate and a 6 percent 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 discount factor(s) to three decimal places.)

A) $50,000.

B) $18,500.

C) $37,350.

D) $13,820

E) None of the choices are correct.

51) If Julius has a 22 percent tax rate and a 10 percent 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 discount factor(s) to three decimal places.)

A) $4,131.

B) $18,775.

C) $5,500.

D) $25,000.

E) None of the choices are correct.

52) Which of the following increases the benefits of income deferral?

A) Increasing tax rates.

B) Smaller after-tax rate of return.

C) Larger after-tax rate of return.

D) Smaller magnitude of transactions.

E) None of the choices are correct.

53) Which of the following decreases the benefits of accelerating deductions?

A) Decreasing tax rates.

B) Smaller after-tax rate of return.

C) Larger after-tax rate of return.

D) Larger magnitude of transactions.

E) None of the choices are correct.

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

A) Increasing tax rates.

B) A taxpayer with severe cash flow needs.

C) If continuing an investment would generate a low rate of return.

D) If continuing an investment would subject the taxpayer to unnecessary risk.

E) None of the choices are correct.

55) The constructive receipt doctrine:

A) is particularly restrictive for accrual-basis taxpayers.

B) causes income to be recognized before it is actually received.

C) causes income to be recognized after it is actually received.

D) applies equally to income and expenses.

E) None of the choices are correct.

56) Rolando's employer pays year-end bonuses each year on December 31. Rolando, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year. So, he leaves town on December 31, 2018, and doesn't pick up his check until January 2, 2019. When should Rolando report his bonus?

A) 2019.

B) 2018.

C) Rolando can choose the year to report the income.

D) it does not matter.

E) None of the choices are correct.

57) If tax rates are decreasing:

A) taxpayers should accelerate income.

B) taxpayers should defer deductions.

C) taxpayers should defer income.

D) taxpayers should defer deductions and accelerate income.

E) None of the choices are correct.

58) If tax rates are decreasing:

A) taxpayers should accelerate income.

B) taxpayers should defer deductions.

C) taxpayers should accelerate deductions.

D) taxpayers should defer deductions and accelerate income.

E) None of the choices are correct.

59) If tax rates are increasing:

A) taxpayers should accelerate income.

B) taxpayers should defer deductions.

C) taxpayers should defer income.

D) you need more information to make a recommendation.

E) None of the choices are correct.

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

A) The taxpayer's after-tax rate of return.

B) The taxpayer's tax rate this year.

C) The taxpayer's tax rate in future years.

D) The taxpayer's tax rate last year.

E) None of the choices are correct.

61) Which of the following is an example of the timing strategy?

A) A corporation paying its shareholders a $20,000 dividend.

B) A parent employing her child in the family business.

C) A taxpayer gifting stock to his children.

D) A cash-basis business delaying billing its customers until after year-end.

E) None of the choices are correct.

62) Which of the following is an example of the timing strategy?

A) A cash-basis taxpayer paying all outstanding bills by year-end.

B) A parent employing her child in the family business.

C) A business paying its owner a $30,000 salary.

D) A taxpayer investing in a tax-preferred investment.

E) None of the choices are correct.

63) Which of the following does not limit the income-shifting strategy?

A) Assignment of income doctrine.

B) Business purpose doctrine.

C) Substance-over-form doctrine.

D) Step-transaction doctrine.

E) None of the choices are correct.

64) A taxpayer paying his 10-year-old daughter $50,000 a year for consulting likely violates which doctrine?

A) Constructive receipt doctrine.

B) Implicit tax doctrine.

C) Substance-over-form doctrine.

D) Step-transaction doctrine.

E) None of the choices are correct.

65) A taxpayer instructing her son to collect rent checks for the taxpayer's property and to report this as taxable income on the son's tax return violates which doctrine?

A) Constructive receipt doctrine.

B) Implicit tax doctrine.

C) Assignment of income doctrine.

D) Step-transaction doctrine.

E) None of the choices are correct.

66) Which of the following is needed to implement the income-shifting strategy?

A) Taxpayers with varying tax rates.

B) Decreasing tax rates.

C) Increasing tax rates.

D) Unrelated taxpayers.

E) None of the choices are correct.

67) A common income-shifting strategy is to:

A) shift income from low tax rate taxpayers to high tax rate taxpayers.

B) shift deductions from low tax rate taxpayers to high tax rate taxpayers.

C) shift deductions from high tax rate taxpayers to low tax rate taxpayers.

D) accelerate tax deductions.

E) None of the choices are correct.

68) Jason's employer pays year-end bonuses each year on December 31. Jason, a cash-basis taxpayer, would prefer not to pay tax on his bonus this year (and actually would prefer his daughter to pay tax on the bonus). So, he leaves town on December 31, 2018, and has his daughter, Julie, pick up his check on January 2, 2019. Who reports the income and when?

A) Julie in 2018.

B) Julie in 2019.

C) Jason in 2018.

D) Jason in 2019.

E) None of the choices are correct.

69) Which of the following is more likely to receive IRS scrutiny under the assignment of income doctrine?

A) A corporation paying its shareholders a $20,000 dividend.

B) A parent employing her child in the family business.

C) A taxpayer gifting stock to his children.

D) A cash-basis business delaying billing its customers until after year-end.

E) None of the choices are correct.

70) Which of the following is an example of the income-shifting strategy?

A) A corporation paying its shareholders a $20,000 dividend.

B) A corporation paying its owner a $20,000 salary.

C) A high tax rate taxpayer investing in tax-exempt municipal bonds.

D) A cash-basis business delaying billing its customers until after year-end.

E) None of the choices are correct.

71) Which of the following is an example of the conversion strategy?

A) A corporation paying its shareholders a $20,000 dividend.

B) A corporation paying its owner a $20,000 salary.

C) A high tax rate taxpayer investing in tax exempt municipal bonds.

D) A cash-basis business delaying billing its customers until after year end.

E) None of the choices are correct.

72) Which of the following may limit the conversion strategy?

A) Implicit taxes.

B) Assignment of income doctrine.

C) Constructive receipt doctrine.

D) Activities with preferential tax rates.

E) None of the choices are correct.

73) Assume that Bill's marginal tax rate is 32 percent. If corporate bonds pay 8 percent interest, what interest rate would a municipal bond have to offer for Bill to be indifferent between the two bonds?

A) 32.00 percent.

B) 10.40 percent.

C) 8.00 percent.

D) 7.00 percent.

E) None of the choices are correct.

74) Assume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds?

A) 37.00 percent.

B) 9.52 percent.

C) 6.00 percent.

D) 3.78 percent.

E) None of the choices are correct.

75) Assume that Larry's marginal tax rate is 24 percent. If corporate bonds pay 10 percent interest, what interest rate would a municipal bond have to offer for Larry to be indifferent between the two bonds?

A) 24.00 percent.

B) 12.00 percent.

C) 10.00 percent.

D) 7.60 percent.

E) None of the choices are correct.

76) Assume that Lavonia's marginal tax rate is 22 percent. If a city of Tampa bond pays 5 percent interest, what interest rate would a corporate bond have to offer for Lavonia to be indifferent between the two bonds?

A) 22 percent.

B) 5 percent.

C) 7 percent.

D) 3.9 percent.

E) None of the choices are correct.

77) Assume that Marsha is indifferent between investing in a city of Destin bond that pays 6 percent interest and a corporate bond that pays 8 percent interest. What is Marsha's marginal tax rate?

A) 50 percent.

B) 40 percent.

C) 30 percent.

D) 20 percent.

E) None of the choices are correct.

78) Assume that Javier is indifferent between investing in a city of El Paso bond that pays 5 percent interest and a corporate bond that pays 6.25 percent interest. What is Javier's marginal tax rate?

A) 50 percent.

B) 40 percent.

C) 30 percent.

D) 20 percent.

E) None of the choices are correct.

79) Assume that Lucas's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential) pays an 8 percent dividend yield, what interest rate would a municipal bond have to offer for Lucas to be indifferent between the two investments from a cash-flow perspective?

A) 32.00 percent

B) 15.00 percent.

C) 8.00 percent.

D) 6.80 percent.

E) None of the choices are correct.

80) Assume that Keisha's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a city of Atlanta bond pays 7.65 percent interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Keisha to be indifferent between the two investments from a cash-flow perspective?

A) 15.00 percent.

B) 10.00 percent.

C) 9.00 percent.

D) 7.65 percent.

E) None of the choices are correct.

81) Assume that Shavonne's marginal tax rate is 37 percent and her tax rate on dividends is 15 percent. If a corporate bond pays 10.20 percent interest, what dividend yield would a dividend-paying stock (with no growth potential) have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?

A) 6.43 percent.

B) 7.56 percent.

C) 10.20 percent

D) 15.00 percent

E) None of the choices are correct.

82) Assume that Will's marginal tax rate is 32 percent and his tax rate on dividends is 15 percent. If a dividend-paying stock (with no growth potential) pays a dividend yield of 8 percent, what interest rate must the corporate bond offer for Will to be indifferent between the two investments from a cash-flow perspective?

A) 12 percent.

B) 11 percent.

C) 10 percent.

D) 8 percent.

E) None of the choices are correct.

83) Assume that Jose is indifferent between investing in a corporate bond that pays 10 percent interest and a stock with no growth potential that pays an 8 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Jose's marginal tax rate?

A) 47 percent.

B) 37 percent.

C) 32 percent.

D) 15 percent.

E) None of the choices are correct.

84) Assume that Juanita is indifferent between investing in a corporate bond that pays 10.20 percent interest and a stock with no growth potential that pays a 6 percent dividend yield. Assume that the tax rate on dividends is 15 percent. What is Juanita's marginal tax rate?

A) 50 percent.

B) 40 percent.

C) 30 percent.

D) 15 percent.

E) None of the choices are correct.

85) If Tom invests $60,000 in a taxable corporate bond that provides a 5 percent before-tax return, how much will Tom's investment be worth in either 8 or 20 years from now when the bond matures? Assume Tom's marginal tax rate is 35 percent.

A) $88,647; $159,198.

B) $92,782; $178,414.

C) $79,621; $121,716.

D) $77,495; $113,750.

E) None of the choices are correct.

86) The income-shifting and timing strategies are examples of:

A) tax avoidance.

B) tax evasion.

C) illegal taxpayer strategies.

D) All of the choices are correct.

E) None of the choices are correct.

87) A taxpayer earning income in "cash" and not reporting it as taxable income is an example of:

A) tax avoidance.

B) tax evasion.

C) conversion.

D) income shifting.

E) None of the choices are correct.

88) Investing in municipal bonds to avoid paying tax on interest earned and to earn a higher after-tax yield is an example of:

A) conversion.

B) tax evasion.

C) timing.

D) income shifting.

E) None of the choices are correct.

89) Paying "fabricated" expenses in high tax rate years is an example of:

A) conversion.

B) tax evasion.

C) timing.

D) income shifting.

E) None of the choices are correct.

90) Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct—i.e., does he understand what the goal of tax planning is? Please elaborate.

91) An astute tax student once summarized that many of the tax planning strategies merely make use of the variation of taxation across different dimensions. Explain why this is true. Be specific.

92) There are two basic timing-related tax rate strategies. What are they? What is the intent of each strategy? In which situations do the tax rate and timing strategies provide conflicting recommendations? What information do you need to determine the appropriate action?

93) Based only on the information provided for each scenario, determine whether Eddy or Scott will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit 3.1.

a. Eddy has a 40 percent tax rate. Scott has a 30 percent tax rate.

b. Eddy and Scott each have a 40 percent tax rate. Eddy has $10,000 of income that could be deferred; Scott has $20,000 of income that could be shifted.

c. Eddy and Scott each have a 40 percent tax rate and $20,000 of income that could be deferred. Eddy's after-tax rate of return is 8 percent. Scott's after-tax rate of return is 10 percent.

d. Eddy and Scott each have a 40 percent tax rate, $20,000 of income that could be deferred, and an after-tax rate of return of 10 percent. Eddy can defer income up to three years. Scott can defer income up to two years.

94) Based only on the information provided for each scenario, determine whether Kristi or Cindy will benefit more from using the timing strategy and why there will be a benefit to that person. Use Exhibit 3.1.

(Round discount factor(s) to three decimal places.)

a. Kristi has a 40 percent tax rate and can defer $20,000 of income. Cindy has a 30 percent tax rate and can defer $30,000 of income.

b. Kristy has a 30 percent tax rate and a 10 percent after-tax rate of return and can defer $25,000 of income for three years. Cindy has a 40 percent tax rate and an 8 percent after-tax rate of return and can defer $20,000 of income for four years.

95) David, an attorney and cash-basis taxpayer, is new to the concept of tax planning and recently learned of the timing strategy. To implement the timing strategy, David plans to establish a new policy that allows his clients to wait up to five years to pay their attorney fees. Assume that David expects his marginal tax rates to remain constant over the foreseeable future. What is wrong with this strategy?

96) Explain why $1 today is not equal to $1 in the future. Why is understanding this concept particularly important for tax planning? What tax strategy exploits this concept?

97) Luther was very excited to hear about the potential tax savings from shifting income from his corporation to himself. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income-shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?

98) Compare and contrast the constructive receipt doctrine and the assignment of income doctrine.

In what situations do these doctrines apply? What tax planning strategies does each doctrine limit?

99) Lucinda is contemplating a long-range planning strategy that will allow her to defer sizable portions of her income for 10 years. What type of planning strategy is she contemplating? What are some potential risks associated with this type of strategy?

100) Jared, a tax novice, has recently learned of several foreign tax havens (i.e., countries with low tax rates). He is considering locating his manufacturing operations in one of these countries solely based on their low tax rates. What types of taxes is Jared ignoring? Explain how these other taxes may affect the viability of Jared's choice to locate in a foreign tax haven.

101) Richard recently received $10,000 of compensation for some consulting work (paid in cash). Jeffrey recently received $10,000 of interest income from city of Dallas bonds. Both taxpayers report no taxable income from these transactions. Is this considered tax avoidance or tax evasion? What is the difference, if any, between the two?

102) Antonella works for a company that pays a year-end bonus in December of each year. Assume that Antonella expects to receive a $20,000 bonus in December this year, her tax rate is 30 percent, and her after-tax rate of return is 8 percent. If Antonella's employer paid her bonus on January 1 of next year instead of in December, how much would this action save Antonella in today's tax dollars? If Antonella's tax rate increased to 32 percent next year, would receiving the bonus in January still be advantageous? Use Exhibit 3.1.

103) Joe Harry, a cash-basis taxpayer, owes $20,000 in tax-deductible accounting fees for his business. Assume that it is December 28th and that Joe Harry can avoid any finance charges if he pays the accounting fees by January 10th. Joe Harry's tax rate this year is 24 percent. His tax rate next year will be 32 percent. His after-tax rate of return is 8 percent. When should Joe Harry pay the $20,000 fees and why? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

104) Rodney, a cash-basis taxpayer, owes $40,000 in tax-deductible consulting fees for his business. Assume that it is December 28th and that Rodney can avoid any finance charges if he pays the accounting fees by January 10th. Rodney's tax rate this year is 32 percent and his after-tax rate of return is 10 percent. What tax rate next year will make Rodney indifferent between paying the $40,000 this year or next year? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

105) Troy is not a very astute investor. He has a knack for investing in losing stocks. In his latest investment move, he has realized a loss of about $40,000 (original basis of $50,000; current fair market value of $10,000) in High Tech, Inc. The good news is that unlike prior years, he actually has $45,000 of gains that he can use to offset the loss. Troy is considering either selling the High Tech, Inc. stock to his sister, Louise, or on the stock market. Which should he choose and why? Please explain why the IRS may treat the two transactions differently.

106) O'Reilly is a masterful lottery player. The megamillion jackpot is now up to $200 million. If O'Reilly wins the jackpot, he has a choice of receiving $200 million in five years or a smaller lump sum now. Advise O'Reilly on his choice under the following scenarios. Which option should he take and why? Use Exhibit 3.1.

a. O'Reilly's after-tax return is 10 percent. If he chooses the current lump-sum option, the lottery will pay him $130 million.

b. O'Reilly's after-tax return is 10 percent. His current tax rate will be 35 percent if he receives the lottery payment now. His expected tax rate in five years will be 40 percent. If he chooses the current lump-sum option, the lottery will pay him $100 million.

107) Sal, a calendar-year taxpayer, uses the cash-basis method of accounting for his sole proprietorship. In late December he performed $40,000 of consulting services for a client. Sal typically requires his clients to pay his bills immediately upon receipt. Assume that Sal's marginal tax rate is 32 percent this year and 37 percent next year and that he can earn an after-tax rate of return of 12 percent on his investments. Should Sal send his client the bill in December or January? Use Exhibit 3.1. (Round discount factor(s) to three decimal places.)

108) Lucky owns a maid service that cleans several local businesses nightly. Lucky, a high tax rate taxpayer, would like to shift some income to his son Rocco. Lucky tells all of his customers (who are always timely in their payments) to pay Rocco, and then Rocco will report 50 percent of the income as a collection fee. Lucky will report the remaining 50 percent. Will this shift the income from Lucky to Rocco? Why or why not? What doctrines influence your answer? Any suggestions for Lucky?

109) Bono owns and operates a sole proprietorship and has a 32 percent marginal tax rate. He provides his son, Richie, $12,000 a year for college expenses. Richie works as a street musician and has a marginal tax rate of 15 percent. What could Bono do to reduce his family tax burden? How much pretax income does it currently take Bono to generate the $12,000 after taxes given to Richie? If Richie worked for his father's sole proprietorship, what salary would Bono have to pay him to generate $12,000 after taxes? (Ignore any Social Security, Medicare, or self-employment tax issues.) How much money would this strategy save?

110) Jayzee is a single taxpayer who operates a sole proprietorship. He expects his taxable income next year to be $150,000, of which $125,000 is attributed to his sole proprietorship. Jayzee is contemplating incorporating his sole proprietorship. Using the 2019 single individual tax brackets and the corporate tax brackets, how much current tax could this strategy save Jayzee? (Ignore any Social Security, Medicare, or self-employment tax issues.) How much income should be retained in the corporation? (Use tax rate schedule) 

111) Bobby and Whitney are husband and wife, and Whitney operates a sole proprietorship. They expect their joint taxable income next year to be $225,000, of which $175,000 is attributed to the sole proprietorship. Whitney is contemplating incorporating the sole proprietorship. Using the 2019 married filing jointly tax brackets and the corporate tax brackets, how much current tax could this strategy save Bobby and Whitney? How much income should be retained in the corporation? (Use tax rate schedule.) 

112) Rob is currently considering investing in municipal bonds that earn 4 percent interest or taxable bonds issued by Dell Computer that pay 6.5 percent. If Rob's tax rate is 20 percent, which bond should he choose? Which bond should he choose if his tax rate is 30 percent? At what tax rate would he be indifferent to the municipal bond or to the corporate bond? What strategy is this decision based upon?

113) Maurice is currently considering investing in a high dividend yield stock with no growth potential that pays a 6 percent dividend yield or bonds issued by the Coca-Cola Company that pay 8 percent. If Maurice's ordinary tax rate is 25 percent and his dividend tax rate is 15 percent, which investment should he choose? Which investment should he choose if his ordinary tax rate is 30 percent? At what ordinary tax rate would he be indifferent between the stock or the bond? What strategy is this decision based upon?

114) Susan Brown has decided that she would like to go back to school after her kids leave home in five years. To save for her education, Susan would like to invest $25,000 in an investment that provides a high return. If her marginal tax rate is 35 percent, what is Susan's after-tax rate of return for the following investment options? Qualified dividends are taxed at 15 percent.

(1) Corporate bond issued at face value with 10 percent stated interest rate payable annually.

(2) Dividend-paying stock with an annual qualifying dividend equal to 10 percent of her investment.

(3) Growth stock with an annual growth rate of 8 percent and no dividends paid. (Round your interim calculations to the nearest whole number.)

115) Boeing is considering opening a plant in one of two neighboring states. One state has a corporate tax rate of 15 percent. If operated in this state, the plant is expected to generate $1,200,000 pretax profit. The other state has a corporate tax rate of 5 percent. If operated in this state, the plant is expected to generate $1,085,000 of pretax profit. Which state should Boeing choose based upon tax considerations only? Why do you think the plant in the state with a lower tax rate would produce a lower pretax income?