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Jana just found out that she is going to receive an end-of-year bonus of $26,200

Finance Nov 03, 2020

Jana just found out that she is going to receive an end-of-year bonus of $26,200. She is in the 35 percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of receiving a bonus, Jana receives the $26,200 as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term? Her income tax on this bonus is $ (Round to the nearest dollar.) Now assume that instead of receiving a bonus, Jana receives the $26,200 as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term? (Select the best answer below.)
O A. Jana will pay $3,930 ($26,200 x 15%) in long-term capital gains taxes. Due to the reduced tax rate, the long-term capital gain offers Jana the best after-tax return. Because short-term capital gains are taxed as ordinary income, she will not receive any tax benefit if she receives the bonus as a short-term capital gain.
B. Jana will pay $3,930 ($26,200 x 15%) in long-term capital gains taxes. Due to the reduced tax rate, the short-term capital gain offers Jana the best after-tax return. Because long-term capital gains are taxed as ordinary income, she will not receive any tax benefit if she receives the bonus as a long-term capital gain.

Expert Solution

Solution:

End year bonus= $26,200

Tax= 35%

Income tax on bonus= 35% of $26,200

Tax= (35/100)*26200

Tax= $9170

Now,

Jana receives $26,200 as long term capital gain.

her tax would be =15% of $26,200

New tax amount= (15/100)*26,200= $3930

Jana will have to pay $3930 as Long term capital gain tax as the short term capital gain tax is taxed as ordinary income thus, Option A is correct.

Option B is wrong because Long term capital gain is not taxed as ordinary income.

Note: Long term capital gain taxes are geneally lower than the short term capital gain taxes due to uncertainties exist in the capital market in the long run and there might be high chances of risk for long term capital assets.

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