A taxpayer is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% 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% before tax, and the interest can be reinvested at 5% 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 will be 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?
Given: Compound amount of $1 and compound value of annuity payments at the end of five years:
|
Interest Rate |
$1 Compounded |
$1 Annuity Compounded |
|
5% |
$1.28 |
$5.53 |
|
4% |
1.22 |
5.42 |
|
3.6% |
1.19 |
5.37 |