Question

The taxpayer's marginal tax bracket is 25%. which would the taxpayer prefer?

Answer 1

The taxpayer would prefer a $1.40 of taxable income rather than a $1.00 tax-exempt income. The explanation behind this is the $1.40 of taxable income is greater and better after tax compared to the $1.00 in taxable income. It is computed by [(1-.25) ($1.40) = $1.05.