Ms. Barstow purchased a limited interest in Quinnel Partnership in 2016. Her share of the partnership’s 2016 business loss was $5,000. Unfortunately, Ms. Barstow could not deduct this loss because she had no passive activity income, so she is carrying it forward into 2017. Quinnel Partnership projects that it will operate at breakeven (no income or loss) for several years. However, Ms. Barstow believes that her partnership interest is a solid long-term investment, and she has no plans to sell it. On January 1, 2017, Ms. Barstow must decide between two new investments that are comparable in terms of risk and liquidity. She could invest $100,000 in TNB Limited Partnership, and her share of the partnership’s 2017 business income would be $8,000. Alternatively, she could invest $100,000 in a high-yield bond fund that promises a 10 percent return (Ms. Barstow would receive $10,000 interest income in 2017). Which investment would result in a better after-tax return for 2017, assuming that:
a. Ms. Barstow is in a 25 percent marginal income tax bracket and is not subject to the Medicare contribution tax?
b. Ms. Barstow is in a 39.6 percent marginal income tax bracket and is subject to the Medicare contribution tax on either the $8,000 partnership income or the $10,000 interest income?