Jackson has the choice to invest in city of Mitchell bonds or Sundial, Incorporated corporate bonds that pay 10 percent interest. Jackson is a single taxpayer who earns $55,000 annually. Assume that the city of Mitchell bonds and the Sundial, Incorporated bonds have similar risk. Assume the original facts as given except that Jackson is a head of household taxpayer and the city of Mitchell pays interest of 8 percent. How would you advise Jackson to invest his money?
A)Invest in Sundial, Incorporated bonds because their explicit tax is greater than the implicit tax on city of Mitchell bonds.
B)Invest in city of Mitchell bonds because their implicit tax is greater than the explicit tax on Sundial, Incorporated bonds.
C)Invest in Sundial, Incorporated bonds because their explicit tax is less than the implicit tax on city of Mitchell bonds.
D)Invest in city of Mitchell bonds because their implicit tax is less than the explicit tax on Sundial, Incorporated bonds.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

As a head of household taxpayer, Jackson's tax rate will be higher than a single taxpayer earning the same amount. Therefore, the tax advantage of city of Mitchell bonds with its implicit tax will be more beneficial to Jackson. Additionally, the difference between 8 percent interest on city of Mitchell bonds and 10 percent interest on Sundial, Incorporated bonds is not significant enough to outweigh the tax advantages of city of Mitchell bonds.

Jackson Has the Choice to Invest in City of Mitchell