Problem $4-28($LO$.1,2,5)$

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 $5\mathrm{.}333\%$ before tax, and the interest can be reinvested at $5\mathrm{.}333\%$ 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? 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:

Interest Rate $$1$ Compounded

for Five Years $$1$ Annuity Compounded

for Five Years

$4\%1\mathrm{.}21675\mathrm{.}4163$

$5\%1\mathrm{.}27635\mathrm{.}5256$

When required, round your answer to the nearest dollar.

a$.$ The taxable bond and reinvested earnings will accumulate at an after$-$tax rate of

$.$

The after$-$tax value of the taxable bond and reinvested earnings will be $fill in the blank $2.$

b$.$ The income from the Series EE bond

be taxed each year.

The after$-$tax value of the Series EE bond will be $fill in the blank $4.$

c$.$ Because the gain on the land will be taxed as a long$-$term capital gain, the sales proceeds less

of the appreciation must exceed $fill in the blank $6.$

d$.$ Therefore, the land must increase in value by at least $fill in the blank $7$ to yield a greater after$-$tax return than the investment in either of the bonds.