Mary is deciding where to invest $10,000. Based on her decision, she will either receive a 5% capital gain or a 7% non-eligible dividend as her return on investment. Mary's marginal tax rates are 45% on regular income, 37% on non-eligible dividends, 28% on eligible dividends, and 23% (rounded) on capital gains. Which of the following is TRUE?

Question

Quizplus · Accepted Answer

First, we need to calculate the after-tax return on each investment option. 
For the capital gain: 
- Mary's tax rate on capital gains is 23%, so her after-tax return would be 5% x (1-0.23) = 3.85%. 
For the non-eligible dividend: 
- Mary's tax rate on non-eligible dividends is 37%, so her after-tax return would be 7% x (1-0.37) = 4.41%. 
Therefore, Mary would receive a higher after-tax rate of return on the non-eligible dividends option.

Mary Is Deciding Where to Invest $10,000