At the beginning of the year, Mr. L put $50,000 cash into Investment X. At the end of the year, he received a check for $2,800, representing his annual return on the investment. Mr. L’s marginal tax rate on ordinary income is 37 percent. However, his return on Investment X is a capital gain taxed at 20 percent.

1. Compute the value of the preferential rate to Mr. L.

2. At the beginning of the year, Mr. L could have invested his $50,000 in Business Z with an 8 percent annual return. However, this return would have been ordinary income rather than capital gain.

A. Considering the fact that Mr. L could have invested in Business Z, how much implicit tax did he pay with respect to Investment X?

B. Did Mr. L make the correct decision by putting his $50,000 into Investment X instead of Business Z?

Answer rating: 100% (QA)

1 Value of preferential rate Income xMarginal tax rate on ordinary Capital gain tax ... View the full answer