Question
Hello, can I get help step by step on how to solve the following problem? As you can see, I'm having trouble understanding tax and
Hello, can I get help step by step on how to solve the following problem? As you can see, I'm having trouble understanding tax and I have to understand it. Thanks in advance,
Deferred Compensation Planning
It's March 2023 and you are a mid-level executive working in Texas. Tomorrow you will have the opportunity to negotiate with your employer to receive some amount of deferred salary in 5 years in exchange for $100,000 of your 2023 performance bonus. If this compensation is not deferred, it will be paid to you on December 31, 2023.Both you and your employer can earn a before-tax annualized rate of return of 10%. Your employers combined federal and state income tax rate is 40% and is expected to remain constant throughout the 5 year period. Because Texas does not have an individual income tax, you will pay only a federal tax of 35% on income earned in 2023.However, you are being transferred to the corporate headquarters in New York City at the beginning of next year where you will be groomed for a top-level position in the corporation.Thus, your combined federal and state income tax rate will be 45% in 2024 and will remain at this level throughout the 5 year period.
- What is the highest deferred compensation payment your employer would be willing to pay?
- What is the lowest deferred compensation payment you would settle for?
- Given the facts stated above, can you and your employer write a mutually beneficial deferred compensation contract?
Now suppose you are married to a psychic. As you are making your computations in preparation for tomorrows meeting, your spouse informs you that s/he is getting a clear image of you reading a copy of The Dallas News dated exactly 5 years from today and demanding that the bartender at the Oak Street Drafthouse give you the AARP discount for retirees.Your spouse interprets this as indicating that you will (1) mentally snap from the stress of living in New York City, (2) quit your job, (3) move to Denton, and (4) have a marginal tax rate of 25% when your deferred compensation is received in 2028. In a very loving way, your spouse reminds you that s/he has never been wrong before.
- Under these new conditions, what is the lowest deferred compensation payment you would settle for? (Hint: You must modify the standard model to accommodate more than one value of tpn.)
- Under these new conditions, can you and your employer write a mutually beneficial deferred compensation agreement?
- What private information might you reveal to your employer by agreeing to defer your compensation?
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