Chapter 1

1. Taxpayer A purchased $100,000 of corporate bonds yielding 12.5% per annum; the interest income from these bonds is taxed at a rate of 28%. Taxpayer B purchased $100,000 of municipal bonds yielding 9% per annum. The interest from these bonds is tax exempt. The bonds have similar maturities and risk.

What is the after-tax rate of return earned by each taxpayer? Is taxpayer B paying taxes in any sense here?

a. Who are the taxes being paid to?

b. What is the implied tax rate?

4. A taxpayer works at a corporation nearing the end of its fiscal year. The company has had a very successful (profitable) year and has decided to award the employee a cash bonus of 20% of annual salary (a bonus of $30,000). The firm has announced that the employee can take the cash bonus this year or defer it until next year. The taxpayer faces a current tax rate of 39.6%, but because she plans to work only a 50% schedule next year, she expects to face a tax rate of 31%. Assuming she can earn 5% after tax on her personal investments, should she accept the bonus this year or next year? Suppose she can earn 15% after tax on her personal investments. Would you change your recommendation?

Chapter 2

3. The taxpayer is the sole owner-employee of a small corporation that prepares tax returns. Before paying himself any salary or dividends or taking fringe benefits, the corporation has taxable income of $100,000. Summarize the tax consequences to both parties (the corporation and the taxpayer) of:

a. paying a salary of $50,000.

b. paying no salary but dividends of $50,000.

c. providing $10,000 of fringe benefits and $40,000 of salary.

5. A taxpayer owns and operates an art gallery with a large inventory of paintings held for sale to customers. She took one of the paintings home and hung it in her dining room. A week later, a dinner guest liked the painting so much that he purchased it at a large profit to the taxpayer. The taxpayer believed that because the painting was displayed at home, it was a personal investment and therefore a capital asset with the profit treated as a capital gain. The painting cost the taxpayer $50,000 and was listed for sale while at the gallery for $90,000. The dinner guest paid $80,000 for the painting.

As an IRS agent, how might you react? What tax do you think the IRS agent will assess the taxpayer (assuming the taxpayer faces the top statutory tax rates)?

Please answer the questions in the excel answer sheet file attached.

Chapter 1 1. Taxpayer A purchased $100,000 of corporate bonds yielding 12.5% per annum; the interest income from these bonds is taxed at a rate of 28%. Taxpayer B purchased $100,000 of municipal bonds yielding 9% per annum. The interest from these bonds is tax exempt. The bonds have similar maturities and risk. What is the after-tax rate of return earned by each taxpayer? Is taxpayer B paying taxes in any sense here? a. Who are the taxes being paid to? b. What is the implied tax rate? 4. A taxpayer works at a corporation nearing the end of its fiscal year. The company has had a very successful (profitable) year and has decided to award the employee a cash bonus of 20% of annual salary (a bonus of $30,000). The firm has announced that the employee can take the cash bonus this year or defer it until next year. The taxpayer faces a current tax rate of 39.6%, but because she plans to work only a 50% schedule next year, she expects to face a tax rate of 31%. Assuming she can earn 5% after tax on her personal investments, should she accept the bonus this year or next year? Suppose she can earn 15% after tax on her personal investments. Would you change your recommendation? Chapter 2 3. The taxpayer is the sole owner-employee of a small corporation that prepares tax returns. Before paying himself any salary or dividends or taking fringe benefits, the corporation has taxable income of $100,000. Summarize the tax consequences to both parties (the corporation and the taxpayer) of: a. paying a salary of $50,000. b. paying no salary but dividends of $50,000. c. providing $10,000 of fringe benefits and $40,000 of salary. 5. A taxpayer owns and operates an art gallery with a large inventory of paintings held for sale to customers. She took one of the paintings home and hung it in her dining room. A week later, a dinner guest liked the painting so much that he purchased it at a large profit to the taxpayer. The taxpayer believed that because the painting was displayed at home, it was a personal investment and therefore a capital asset with the profit treated as a capital gain. The painting cost the taxpayer $50,000 and was listed for sale while at the gallery for $90,000. The dinner guest paid $80,000 for the painting. As an IRS agent, how might you react? What tax do you think the IRS agent will assess the taxpayer (assuming the taxpayer faces the top statutory tax rates)? Type your name here------> Points earned --> 50 Read the instructions and hints before attempting to complete the solution. Enter your responses and answers in the areas specified. There are 50 total points for this assignment. The point value of each exercise is determined by dividing the 50 points by the number of exercises per assignment. If you have difficulty with any of the exercieses, take advantage of the collaboration discussion forum. Workshop 1 1 Introduction to tax strategy 1, 4 2 Tax planning fundamentals 3, 5 Chapter 1 Exercise 1 Points possible 12 Deductions Points earned 12 1. Taxpayer A purchased $100,000 of corporate bonds yielding 12.5% per annum; the interest income from these bonds is taxed at a rate of 28%. Taxpayer B purchased $100,000 of municipal bonds yielding 9% per annum. The interest from these bonds is tax exempt. The bonds have similar maturities and risk. Question: What is the after-tax rate of return earned by each taxpayer? Is taxpayer B paying taxes in any sense here? type our answer below. Calculate after-tax rate for each TP here Bond rate x (1-tax rate) = after-tax rate