Tax Planning Problems: The following problems may require you to research the relevant tax law relating to the issue involved. There is no need to prepare a memo, but provide support for your response with necessary calculations. On some of the problems, you may need to use PV tables.

1. Zac, who is in the 24% marginal tax bracket, holds a stock with an adjusted basis of $50,000 that would sell today for $120,000; however, the stock has been held for only 9 months. How much decline in value can Zac afford to absorb and yet still be as well off on an after-tax basis in order to qualify for the 15% long-term rate?

2. The Arkansas Lottery has decided to offer winners a choice of $100,000 in 10 years or some amount currently. Assume that the Arkansas Lottery earns a 10 percent after-tax rate of return. What amount should the Arkasnas Lottery offer lottery winners currently, in order for it to be indifferent between the two choices?

3. 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 37 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 billthis year or next? How would your answer change if Isabels after-tax rate of return were 8 percent?

4. Dora is currently considering investing in municipal bonds that earn 6% interest, or in taxable bonds issued by Explorer Boots, Inc. that pay 8 percent. If Doras tax rate is 22 percent, which bond should she choose? Which bond should she choose if her tax rate is 32 percent? At what tax rate would she be indifferent between the bonds?

5. Greg is planning on renting his vacation home this summer. He can rent his home for 10 days for $500 per day or for 16 days at $400 per day. Which is the better option for him? Rental expense are nominal. Assume his marginal rate is 12%. Prepare your response again assuming his marginal rate is 24%.

6. Tom is considering making an investment in municipal bonds yielding 5%. What would the yield on a taxable bond have to be to provide a higher after-tax return than the municipal bond if Tom is in a 37% marginal tax rate bracket?

7. Laurie is thinking about investing in one or several of the following investment options: Corporate bonds (ordinary interest paid annually) Dividend-paying stock (qualified dividends) Life insurance (tax-exempt)

   Savings account

   Growth stock a. Assuming all of the options earn similar returns before taxes, rank Lauries investment options from highest to

   lowest according to their after-tax returns. b. Which of the investments employ the deferral and/or conversion tax planning strategies? c. How does the time period of the investment affect the returns from these alternatives?

   d. How do these alternative investments differ in terms of their nontax characteristics?

8. Moana is a single taxpayer who operates a sole proprietorship. She expects her taxable income next year to be $250,000, of which $200,000 is attributed to her sole proprietorship. Moana is contemplating incorporating her sole proprietorship. Using the single individual tax brackets and the corporate tax rate, find out how much current tax this strategy could save Moana (ignore any Social Security, Medicare, or self-employment tax issues). How much income should be left in the corporation?