Certain skills are necessary for successful tax planning.One of these skills is applying the time value of money.Which of the following is FALSE regarding this skill?
A) Applying the time value of money is a tool used for wealth accumulation.
B) If a taxpayer invests $1,000 at 8% and subsequently earns $48 in after-tax income on the investment at the end of the first year, the taxpayer's tax rate is 40%.
C) If a taxpayer earns an annual return of 12% and is subject to a 40% tax rate, the annual after-tax return is 4.8%.
D) If a taxpayer invests $1,000 for one year at a rate of return of 14% and is subject to a 45% tax rate, the compounded after-tax value of the investment will be $1,077.

Question

Quizplus · Accepted Answer

The annual after-tax return should be calculated by multiplying the annual return by (1 - tax rate). For a 12% return and a 40% tax rate, the after-tax return is 12% * (1 - 0.40) = 7.2%, not 4.8%.

Certain Skills Are Necessary for Successful Tax Planning