Question

g Jana just found out that she is going to receive an​ end-of-year bonus of ​$32,200. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of receiving a​ bonus, Jana receives the ​$32,200 as a​ long-term capital gain. What will be her​ tax? Which form of compensation offers Jana the best​ after-tax return? Would your calculation be different if the gain was​ short-term rather than​ long-term? Her income tax on this bonus is ​$nothing. ​(Round to the nearest​ dollar.) Now assume that instead of receiving a​ bonus, Jana receives the ​$32,200 as a​ long-term capital gain. What will be her​ tax? Which form of compensation offers Jana the best​ after-tax return? Would your calculation be different if the gain was​ short-term rather than​ long-term? ​ (Select the best answer​ below.) A. Jana will pay ​$4,830 ​($32,200× ​15%) in​ long-term capital gains taxes. Due to the reduced tax​ rate, the​ long-term capital gain offers Jana the best​ after-tax return. Because​ short-term capital gains are taxed as ordinary​ income, she will not receive any tax benefit if she receives the bonus as a​ short-term capital gain.

Answer 1

Jana just found out that she is going to receive an​ end-of-year bonus of ​$32,200. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus.

• tax liability = $32,200 x 35% = $11,270

Now assume that instead of receiving a​ bonus, Jana receives the ​$32,200 as a​ long-term capital gain. What will be her​ tax?

• tax liability = $32,200 x 15% = $4,830

Which form of compensation offers Jana the best​ after-tax return?

• if the bonus is taxed as a long term capital gain, she will páy less than half the taxes, so it is the best option for her

Would your calculation be different if the gain was​ short-term rather than​ long-term?

• Short term capital gains are taxed at the same rate as ordinary income, so the difference between the bonus being a long vs short term capital gain is very significant to Jana.