Jana just found out that she is going to receive an end-of-year bonus of

$40,000.

She is in the

35

percent marginal tax bracket. Calculate her income tax on this bonus. Now assume that instead of receiving a bonus, Jana receives the

$40,000

as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term?

Question content area bottom

Part 1

Her income tax on this bonus is

$enter your response here.

(Round to the nearest dollar.)

Part 2

Now assume that instead of receiving a bonus, Jana receives the

$40,000

as a long-term capital gain. What will be her tax? Which form of compensation offers Jana the best after-tax return? Would your calculation be different if the gain was short-term rather than long-term? (Select the best answer below.)

A.

Jana will pay

$6,000

($40,000

15%) in long-term capital gains taxes. Due to the reduced tax rate, the short-term capital gain offers Jana the best after-tax return. Because long-term capital gains are taxed as ordinary income, she will not receive any tax benefit if she receives the bonus as a long-term capital gain.

B.

Jana will pay

$6,000

($40,000

15%) in long-term capital gains taxes. Due to the reduced tax rate, the long-term capital gain offers Jana the best after-tax return. Because short-term capital gains are taxed as ordinary income, she will not receive any tax benefit if she receives the bonus as a short-term capital gain.