Reginald is thinking about asking his employer to defer a $5000 bonus to next ye

Question

Reginald is thinking about asking his employer to defer a $5000 bonus to next years income because he would have to pay $2050 in tax if he received it this year. What should he do? Answers: If his marginal tax rate next year will be less than 41 percent he should defer it to next year. If his marginal tax rate next year will be less than 35 percent he should consider deferring it. He should take the bonus now because of the opportunity cost. If his marginal tax rate next year will be less than 45 percent, be should defer it to next year.

Explanation / Answer

Marginal tax rate this year = (Tax / Bonus) × 100

                                           = ($2,050 / $5,000) × 100

                                           = 41%

If the marginal tax rate is less than 41% in the next year, he should defer the bonus in the next year. Reduction in tax rate in the next year gives him the benefit of saving. Therefore, deferring the income would be beneficial for him.

Answer: The first option is correct.

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