Question

Harper is considering three alternative investments of $10,000. Assume that the taxpayer is in the 24% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are: • A taxable corporate bond yielding 5.333% before tax and the interest can be reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return). Land that will increase in value. The gain on the land is classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds? Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: Interest Rate $1 Compounded for Five Years $1 Annuity Compounded for Five Years 4% 1.2167 5.4163 5% 1.2763 5.5256 When required, round your answer to the nearest dollar. a. The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4%. The after-tax value of the taxable bond and reinvested earnings will be $ 12,167 b. The income from the Series EE bond will not be taxed each year. X. The after-tax value of the Series EE bond will be $ c. Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15% of the appreciation must exceed $ 12,167 .

Answer 1

Answer -

A)

The taxable bond and reinvested earnings will accumulate at an after-tax rate of 4.0%

The after tax value of the taxable bond and reinvestment earnings will be [(1 − .25) × .05333] = $12,167 at the end of five years [($10,000 × 1.2167) = $12,167].

B)

The income from the Series EE bond will not be taxed each other

The after-tax value of the Series EE bond $11,672.(12,200 - (0.24*(12,200 - 10,000)) = 11,672)

C)

Because the gain on the land will be taxed as a long-term capital gain, the sales proceeds less 15% of the appreciation must exceed $12,167.

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