2. Assume that a taxpayer can choose when he is to receive $10,000 of fully taxa

Question

2. Assume that a taxpayer can choose when he is to receive $10,000 of fully taxable income. If the taxpayer receives the income at the end of Year 1, he will receive exactly $10,000. If he delays receipt of the income until the end of Year 2, the amount will grow to $11,000. If the taxpayer takes the money at the end of Year 1, he can invest the proceeds and earn a pre- tax return of 10 percent over the next year. a. If the taxpayer faces a marginal tax rate of 31 percent in both Year 1 and Year 2, when should he elect to receive the income? b. At what pre- tax rate of return, will the taxpayer be indifferent to taking the money in Year 1 and Year 2? c. If the taxpayer

Explanation / Answer

a.

Take $$ in Year 1

$10,000 x (1-31%) = $6,900 after taxes x (1+10%) = $7,590 in year 2

$7,590

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