Question: Suppose the taxpayer can time when he is to receive $100,000 of income that is fully taxable. Current interest rates are 10% on fully taxable securities and the taxpayer faces a current tax rate of 31%. If the taxpayer delays receipt the amount will grow to $110,000 at the end of year 2. The taxpayer must decide whether to receive the money today at the end of year 1 or at the end of year 2.
a. . When should the taxpayer elect to receive the income?
b. Is there an interest rate at which the taxpayer is indifferent between the two options?
c. The taxpayer expects tax rates to increase to 35% in year 2. Now when should he elect to receive the income?
d. At what tax rate in period 2 is the taxpayer indifferent between the two options?