Tammy, a resident of Virginia, is considering purchasing a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct any state taxes paid on her Federal income tax return. In your analysis, assume that the bond amount is $100,000.
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Chapter 5 Solutions
South-Western Federal Taxation 2019: Individual Income Taxes (Intuit ProConnect Tax Online 2017 & RIA Checkpoint 1 term (6 months) Printed Access Card)
- Tonya, who lives in California, inherited a $100,000 State of California bond in 2021. Her marginal Federal tax rate is 35%, she itemizes deductions on her Federal tax return, and her marginal state tax rate is 5%. The California bond pays 3.3% interest, which is not subject to California income tax. She can purchase a corporate bond of comparable risk that will yield 5.2% or a U.S. government bond that pays 4.6% interest. What is the after-tax income from each bond? California bond: $ Corporate bond: $ U.S. government bond: $arrow_forwardMikki is currently in a high-income tax bracket. She would prefer to own an inventment that generates tax-free income. If Mikki buys a municipal bond issued by a state other than her own, the interest she earns will be: taxable at the federal level but tax-free at the state level. tax-free at the federal level. considered a divident and taxed at a miinimum rate of 10% at the federal level. taxable at both the state and federal level.arrow_forwardFergie has the choice between investing in a State of New York bond at 5 percent and a Surething Inc. bond at 8 percent. Assuming that both bonds have the same nontax characteristics, and that Fergie has a 30 percent marginal tax rate, in which bond should she invest?arrow_forward
- Eunice is single and in the 24% federal and 5% state tax brackets. She is considering the purchase of amunicipal bond, issued in her state of residence, with a YTM of 6.75%. What is Eunice's tax equivalent yield on the bond? O 9.51% O 4.79% 8.87% O 6.75%arrow_forwardMs. Vincent resides in a jurisdiction with a 35 percent income tax. Ms. Vincent has $40,000 that she could invest in bonds paying 8 percent annual interest. She is also considering spending the $40,000 on a new luxury automobile. Ms. Vincent is having a hard time deciding between these two alternatives. Why might her decision be easier if the jurisdiction increases its income tax rate to 50 percent?arrow_forwardChloe is single and in the 24% federal tax bracket and 5% state tax bracket. She is considering the purchase of a municipal bond, with a YTM of 5% Chloe's tax equivalent yield on the bond (assume that she is not subject to the 3.8% Net Investment Income Tax) is closest to: a. 6.58% b. 7.04% c. 5.26% d. 10.77%arrow_forward
- Dennis is currently considering investing in municipal bonds that earn 6 percent interests, or in taxable bonds issued by the Coca-Cola Company that pay 8 Percent. a. If Dennis tax rate is 22 percent, which bond should he choose? Municipal bonds or Taxable Bonds. b. Which bond should he chooise if his tax rate is 32 percent? Municipal bonds or Taxable bonds. c. At what tax rate would he be indifferent between the bonds? Tax rate ? d. What Strategy is this decision based Upon? Development planning strategy, Business planning strategy, Decision planning strategy, Marketing planning strategy, Conversion planning strategy, Timing strategy, Income shifting strategy.arrow_forwardMelinda invests $200,000 in a City of Heflin bond that pays 6 percent interest. Alternatively, Melinda could have invested the $200,000 in a bond recently issued by Surething Incorporated that pays 8 percent interest and has risk and other nontax characteristics similar to the City of Heflin bond. Assume Melinda’s marginal tax rate is 25 percent. How much explicit tax would she have paid on the Surething Incorporated bond? What is her after-tax rate of return on the Surething Incorporated bond?arrow_forwardAssume that John's marginal tax rate is 37 percent. If a city of Austin bond pays 6.5 percent interest, what interest rate would a corporate bond have to offer for John to be indifferent between the two bonds? Question 4 Marc, & married taxpayer, earns 5640,000 in taxable income and $8,300 in interest from an investment in city of Birmingham bonds. Using the U.S. tax rate schedule for year 2022, what is his current marginal tax rate? (Use tax rate schedule.)arrow_forward
- An investor is attempting to decide between the purchase of a tax-free municipal bond or a corporate bond. She is in the 32% tax bracket (rate). A municipal bond yields 2.2% interest and a corporate bond yields 3.1% interest. Which should she purchase? Please state the reason.arrow_forwardMable is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate bond paying 7 percent. From a tax standpoint, which investment would you advise her to make and why? Please show your work.arrow_forwardMelinda invests $330,000 in a City of Heflin bond that pays 4.8 percent interest. Melinda could have invested the $330,000 in a bond recently issued by surething incorporated that pays 8 percent interest and has risk and other characteristics similar to the city of Heflin bond. Assume Melinda’s marginal tax rate is 40 percent. A. What is her after tax rate of return for the city of Heflin bond? B. How much explicit tax does Melinda pay on the city of Heflin bond? C. How much implicit tax does she pay on the city of Heflin bond? D. How much explicit tax would she have to paid on the sure thing incorporated bond? E. What is her after tax of return on the sure thing incorporated bond?arrow_forward
- Individual Income TaxesAccountingISBN:9780357109731Author:HoffmanPublisher:CENGAGE LEARNING - CONSIGNMENT