28. LO.1, 2, 5 A taxpayer is considering three alternative investments of $10,000. Assume that the taxpayer is in the 28% marginal tax bracket for ordinary income and 15% for qualifying capital gains in all tax years. The selected investment will be liquidated at the end of five years. The alternatives are:

• A taxable corporate bond yielding 5% before tax, and the interest can be reinvested at 5% before tax.

• A Series EE bond that will have a maturity value of $12,200 (a 4% before-tax rate of return).

• Land that will increase in value.

The gain on the land will be classified and taxed as a long-term capital gain. The income from the bonds is taxed as ordinary income. How much must the land increase in value to yield a greater after-tax return than either of the bonds?

Given: Compound amount of $1 and compound value of annuity payments at the end of five years:

Interest Rate

$1 Compounded for 5 Years

$1 Annuity Compounded for 5 Years 5% $1.28 $5.53 4% 1.22 5.42 3.6% 1.19 5.37