Individual Income Taxes
43rd Edition
ISBN: 9780357109731
Author: Hoffman
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 4, Problem 48P
To determine
Identify the option which will take full advantage of after-tax wealth.
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Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy's father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rate is 3%. Hal agrees to either of the following:
Roy borrows from the bank with Hal's guarantee to the bank.
Hal cashes in the CD (with no penalty) and lends Roy the funds at 2% interest.
Hal is in the 32% marginal tax bracket. Roy, whose only source of income is his salary, is in the 12% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him.
Roy decides to buy a personal residence and goes to the bank for a $150,000 loan. The bank tells him that he can borrow the funds at 4% if his father will guarantee the debt. Roy's father, Hal, owns a $150,000 CD currently yielding 3.5%. The Federal rate is 3%. Hal agrees to either of the following:
Roy borrows from the bank with Hal's guarantee to the bank.
Hal cashes in the CD (with no penalty) and lends Roy the funds at 2% interest.
Hal is in the 32% marginal tax bracket. Roy, whose only source of income is his salary, is in the 12% marginal tax bracket. The interest Roy pays on the mortgage will be deductible by him.
Considering only the tax consequences, answer the following.
a. The loan guarantee:Hal's interest income from the CDs would be $ before taxes and $ after taxes.
Roy's interest expense from the bank loan would be $ before taxes and $ after taxes.
This arrangement would produce an overall cash flow after taxes to the family of $.
b. The loan from Hal to Roy:Hal's tax…
Wally is employed as an executive with Pay More Incorporated. To entice Wally to work for Pay More, the corporation loaned him $20,000 at the beginning of the year at a simple interest rate of 1 percent. Wally would have paid interest of $2,400 this year if the interest rate on the loan had been set at the prevailing federal interest rate.
Required:
Wally used the funds as a down payment on a speedboat and repaid the $20,000 loan (including $200 of interest) at year-end.
a-1. Does this loan result in any income to either party?
a-2. Indicate the amount below.
Assume instead that Pay More forgave the loan and interest on December 31. What amount of gross income does Wally recognize this year?
Chapter 4 Solutions
Individual Income Taxes
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