Question

Art is in the 24% marginal tax bracket for 2019. He owes a $10,000 bill for business expenses. Because he reports taxable income on a cash basis, he can deduct the $10,000 in either 2019 or 2020, depending on when he makes the payment. He can pay the bill at any time before January 31, 2020, without incurring the normal 8% interest charge. If he expects to be in a 32% marginal tax bracket for 2020, he should pay the bill and claim the deduction in 2020 . How much tax saving will Art realize by claiming the deduction in the year you answered above if the present value factor for 1 period at 8% equals 0.926?

Answer 1

Answer:

$740.8

Explanation:

To answer this question the following steps are undertaken

1) We consider the Marginal tax bracket Art falls within. And it becomes obvious that his bracket in 2020 is higher than that of 2019. The implication of this discovery is that claiming expenses in 2020 will save more taxes for Art than in 2019.

2) What is his tax savings in 2020 = $10,000 x (0.32-0.24) = $800

Finally, since the present value of tax savings is 0.926

Then the tax savings to realize for 2020 is

$800 x 0.926 = $740.8