Certain Skills Are Necessary for Successful Tax Planning

question 5

Multiple Choice

Certain skills are necessary for successful tax planning. One of these skills is applying the time value of money. Which of the following is FALSE regarding this skill?

• A) Applying the time value of money is a tool used for wealth accumulation.
• B) If a taxpayer invests $1,000 for one year at a rate of return of 14% and is subject to a 45% tax rate, the after-tax value of the investment will be $1,077.
• C) If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, the taxpayer's tax rate is 40%.
• D) If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annual after-tax return is 4.8%.

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Definitions:

Retained Earnings

Retained earnings are the accumulated net profits that a company chooses to keep rather than distribute to shareholders as dividends, often reinvested in the business.

Deficit

The shortfall that occurs when expenses exceed income or revenues.

IFRS

International Financial Reporting Standards, a set of accounting standards for financial reporting that is accepted globally.

Statement of Changes

A financial document that outlines the reasons for changes in equity, including transactions with owners and comprehensive income, over a period.