Research Memorandum

I.Tom can choose when he is to receive $100,000 of fully taxable bonus. If he receives the bonus at the end of 2016, his bonus will be $100,000. If he postpones receipt of the bonus until the end of 2017, the amount will be $110,000. If Tom receives the bonus at the end of 2016, he can invest the proceeds with a pre-tax return of 10% over the next year.

a.If the marginal tax rate of Tom is 31% in 2016 and 2017, when should he elect to receive the bonus?

b.At what pre-tax rate of return will Tom be indifferent to receiving the bonus in the alternative years?

c.If the marginal tax rate of Tom increases to 35% in 2017, when should he elect to receive the bonus?

d.What would the tax rate need to be in 2017 to make Tom indifferent to the two options?