IN THE TEXT -Rodney,a Cash Basis Taxpayer,owes $40,000 in Tax Deductible Consulting Fees

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The Answer is If Rodney pays the $40,000 in December,the $40,000 tax deduction will save him $12,000 (i.e.,$40,000 × 0.30 = $12,000). If Rodney pays the $40,000 in January,the tax savings in today's dollars is computed as:Tax Savings = $40,000 × tax rate × 0.909 (Discount Factor,1 year,10%). For Rodney to be indifferent between paying the $40,000 in December and January,paying the $40,000 in January must generate $12,000 in tax savings.One can use this information to solve for next year's tax rate. Tax Savings = $40,000 × tax rate × 0.909 (Discount Factor,1 year,10%)= $12,000 Tax rate = ($12,000/$40,000)× (1/0.909)= 33.0033% Alternatively,$40,000 × 0.909 = $36,360.$36,360 × tax rate = $12,000.$12,000/$36,360 = 33.0033%

IN THE TEXT -Rodney,a Cash Basis Taxpayer,owes $40,000 in Tax Deductible Consulting Fees

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IN THE TEXT -Rodney,a Cash Basis Taxpayer,owes $40,000 in Tax Deductible Consulting Fees

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Correct Answer:VerifiedShow Answer

Correct Answer:
Verified