Mr. Gordon, a resident of Pennsylvania, paid $20,000 for a bond issued by Delaware. This year, he received $800 of interest on the bond. His marginal state tax rate is 7%, and under Pennsylvania law, interest on debt obligations issued by another state is taxable. Mr. Gordon can deduct state income tax on his federal return, and his marginal federal tax rate is 35%. Computer his after-tax rate of return on the bond.

Question

Quizplus · Accepted Answer

First, we need to calculate the state income tax on the interest earned, which is $56 ($800 x 7%). Then, we need to calculate the federal income tax on the interest earned, which is $280 ($800 x 35%).

So, Mr. Gordon's total tax liability on the interest earned is $336 ($56 + $280).

Now, we can calculate the after-tax rate of return:

$800 - $336 = $464 (net interest earned)

$464 / $20,000 = 0.0232

0.0232 x 100 = 2.32%

Therefore, Mr. Gordon's after-tax rate of return on the bond is 2.32%.

However, since the question asks for the answer rounded to two decimal places, the answer is 3.82% (rounded from 2.32%).

Mr Gordon, a Resident of Pennsylvania, Paid $20,000 for a Bond