Question

1. Which of the following is an acceptable example of the timing strategy?

A. A cash basis taxpayer avoids collecting income that is made unconditionally available.
B. A taxpayer investing in a tax preferred investment.
C. None the choices are correct.
D. A parent employing her child in the family business.
E. A business paying its owner a dividend.

2. A TP invests $300,000 in a city of Providence (municipal) bonds that pays 7% interest. Alternatively, he could have invested the $300,000 in a bond recently issued by Ocean State Corporation, Inc (corporate bond) that pays 10% interest with similar risk as the city of Providence bond. Assume that the TP’s marginal tax rate is 37%.

How much tax would the TP be responsible for paying on interest earned on the Ocean State Corporation Inc. bond?

A. $11,000

B. $21,000

C. $30,000

D. $7,875

E. None of the choices are correct.

Answer 1

1. A timing strategy in a Tax Planning can be understood as the activity undertaken by the assessee to reduce the tax liability by making optimum use of all permissible allowances, deductions, concessions, exemptions, rebates, exclusions and so forth, available under the statute. Hence any planning that can reduce the taxes over a period of time can be considered a good strategy. hence Option B is correct that taxpayer investing in a tax preferred investment will help in reducing the taxes.

2. Corporate bonds are fully taxable at all levels as these bonds typically contain the highest level of default risk, they also pay the highest interest rates of any major category of bond.

So Interest earned by TP:

10% of $300,000 = $30,000

Tax Rate is 37%: So taxes $30,000 * 37% = $11,100.

So option E is correct as tax amount payable is $ 11,100