Question

If Rachel has a 40% tax rate and a 10% after-tax rate of return, a $100,000 tax deduction in one year will save how much tax in today's dollars (rounded)?

1) 100,000
2) 40,000
3) 37,040
4) 36,360
5) None of the above

Answer 1

A $100,000 tax deduction will save Rachel $40,000 in today's dollars.

Step-by-step explanation:

The student is asking how much a $100,000 tax deduction in one year will save in today's dollars, given that Rachel has a 40% tax rate and a 10% after-tax rate of return.

To calculate the amount of tax saved, we need to determine the after-tax income. If Rachel has a 40% tax rate, she will pay taxes of 40% * $100,000 = $40,000. The after-tax income will be $100,000 - $40,000 = $60,000.

Therefore, the $100,000 tax deduction will save Rachel $40,000 in today's dollars, making option 2) 40,000 the correct answer.