Example 12 cliff a 396 bracket taxpayer has 50000

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Chapter 9 / Exercise 5
Exploring Macroeconomics
Sexton
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EXAMPLE 1.2 Cliff, a 39.6% bracket taxpayer, has $50,000 available to invest. After evaluating the pros and cons of stocks, bonds, money market certificates, and other types of investments, his decision is limited to the following two choices: Freemont Highway municipal bonds, rate of interest 9% Data-Search Inc., corporate bonds, rate of interest 12% Freemont Data-Search Interest income (before taxes) $4,500 $6,000 Income taxes 0 2,376 Yield (after taxes) $4,500 $3,624 Result. Cliff will select the Freemont municipal bonds. Even with a lower rate of interest than the corporate obligations, Freemont provides a larger after-tax yield. A common but simplistic criticism of this tax provision is that the wealthy individual has used a loophole to avoid $1,782 of taxes ($4,500 interest × 39.6 percent tax rate), thereby depriving the U.S. government of a corresponding amount of revenue. However, this criticism must be weighed against the underlying purpose of the municipal bond provision which is encouraging taxpayers to invest in state and local obligations and allowing the various municipalities to compete for resources in the bond market at a lower rate of interest than corporate bonds. ¶1175 ECONOMIC FACTORS Over the years, numerous provisions of the tax law have been employed to help stimulate the economy, to encourage capital investment, or to direct resources to selected business activities. Perhaps the most well-known provision of the tax law, designed to serve as a stimulus to the economy, was the investment tax credit. This credit, which served to encourage investment in qualified property, primarily tangible personal property used in a trade or business, had been suspended for a period of time, repealed, reinstated, and again repealed. Similar to its use of the investment credit, Congress has used depreciation write-offs as a means of controlling the economy. Viewed as a popular stimulus for business investment is the tax benefit resulting from the accelerated cost recovery methods of depreciation. Additionally, the related election to expense allows the taxpayer to deduct as much as $500,000 (in 2013) of the cost of qualifying property in the year of purchase. However, where the cost of qualified property placed in service during the year exceeds $2,000,000, the $500,000 ceiling is reduced by the amount of such excess. However, for tax years after 2013, the maximum expensing is scheduled to drop. Various other tax provisions have been employed to help stimulate selected industries. Thus, unique tax benefits, such as the provisions for percentage depletion, apply to the mining of natural resources. Correspondingly, farming activities benefit from special elections to expense rather than capitalize soil and water conservation expenditures under an approved conservation plan.
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Chapter 9 / Exercise 5
Exploring Macroeconomics
Sexton
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Small business investment has been encouraged by various provisions. For example, certain types of small businesses may elect to file as an S corporation, which essentially provides the limited liability protection of corporate status, while treating most items of income as if the entity were a partnership. Correspondingly, a special rule allows ordinary loss treatment for small

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