Reference no: EM132972

Question :

Consider that a taxpayer will choose when he is to receive $10,000 of entirely taxable income. If the taxpayer gets the income at the end of Year 1, he will receive precisely $10,000. If he delays receipt of the income until the end of Year 2, the amount can grow to $11,000. If the taxpayer takes the money at the end of Year 1, he will invest the proceeds and earn a pre- tax return of 10% 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 select to receive the income? b. At what pre- tax rate of return, can the taxpayer be indifferent to taking the money in Year 1 and Year 2? c. If the taxpayer's marginal tax rate increases to 35% in Year 2, when could he elect to receive the income? d. What would the tax rate need to be in Year 2 to make the taxpayer indifferent?