Ahmad Is Considering Making a $10,000 Investment in a Venture

question 16

Multiple Choice

Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment?

• A) $0, take neither the itemized deduction nor the tax credit.
• B) $2,500, take the tax credit.
• C) $2,800, take the itemized deduction.
• D) Both options produce the same benefit.
• E) None of the above.

---

Definitions:

Compounded Semi-annually

Interest calculation method that adds interest to the principal sum twice a year, resulting in interest accumulation on interest already accrued.

Compounded Semi-annually

An interest calculation method where interest is calculated and added to the principal twice a year.

Strip Bond

A financial instrument representing debt, where the main amount and the interest payments have been separated and are traded independently.

Market Rate

The prevailing interest rate available in the marketplace for loans or investments of a similar risk and maturity.