Harper is considering three alternative investments of $10,000. Harper 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 sold at the end of five years. The alternatives are: ■ A taxable corporate bond yielding 5.333% before tax and the interest reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% pretax 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 interest from the bonds is taxed as ordinary income: the interest from the corporate bond as it is earned annually, but that from the Series EE bond is recognized only upon redemption. How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of property taxes on the land. Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: $1 Compounded $1 Annuity Compounded Interest Rate for Five Years for Five Years 1.2167 1.2763 5.4163 5.5256 4% 5% 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 $ b. The income from the Series EE bond will not be taxed each year. 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% exceed $ d. Therefore, the land must increase in value by at least $ of the bonds. of the appreciation must to yield a greater after-tax return than the investment in either
Harper is considering three alternative investments of $10,000. Harper 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 sold at the end of five years. The alternatives are: ■ A taxable corporate bond yielding 5.333% before tax and the interest reinvested at 5.333% before tax. • A Series EE bond that will have a maturity value of $12,200 (a 4% pretax 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 interest from the bonds is taxed as ordinary income: the interest from the corporate bond as it is earned annually, but that from the Series EE bond is recognized only upon redemption. How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of property taxes on the land. Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years: $1 Compounded $1 Annuity Compounded Interest Rate for Five Years for Five Years 1.2167 1.2763 5.4163 5.5256 4% 5% 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 $ b. The income from the Series EE bond will not be taxed each year. 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% exceed $ d. Therefore, the land must increase in value by at least $ of the bonds. of the appreciation must to yield a greater after-tax return than the investment in either
SWFT Essntl Tax Individ/Bus Entities 2020
23rd Edition
ISBN:9780357391266
Author:Nellen
Publisher:Nellen
Chapter4: Gross Income
Section: Chapter Questions
Problem 13P
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Transcribed Image Text:Harper is considering three alternative investments of $10,000. Harper 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 sold at the end of five years. The alternatives are:
■ A taxable corporate bond yielding 5.333% before tax and the interest reinvested at 5.333% before tax.
• A Series EE bond that will have a maturity value of $12,200 (a 4% pretax 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 interest from the bonds is taxed as ordinary income: the
interest from the corporate bond as it is earned annually, but that from the Series EE bond is recognized only upon redemption.
How much must the land increase in value to yield a greater after-tax return than either of the bonds? For this analysis, ignore the effect of
property taxes on the land.
Below are the factors for the compound amount of $1 and compound value of annuity payments at the end of five years:
$1 Compounded
$1 Annuity Compounded
Interest Rate
for Five Years
for Five Years
1.2167
1.2763
5.4163
5.5256
4%
5%
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 $
b. The income from the Series EE bond will not
be taxed each year.
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%
exceed $
d. Therefore, the land must increase in value by at least $
of the bonds.
of the appreciation must
to yield a greater after-tax return than the investment in either
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