CPA · Question 04 · Area I: Individual Compliance and Planning
A taxpayer anticipates their marginal tax rate will increase from 24% in Year 1 to 35% in Year 2. They have a $20,000 consulting fee they can invoice in December Year 1 (receiving payment immediately) or January Year 2. They also have a $10,000 property tax bill due in January Year 2 that can be prepaid in December Year 1. Assuming the time value of money is negligible and they itemize deductions in both years, which strategy minimizes their total tax liability over the two years?
Answer options:
Recognize income in Year 1; Pay expense in Year 1.
Recognize income in Year 1; Pay expense in Year 2.
Recognize income in Year 2; Pay expense in Year 1.
Recognize income in Year 2; Pay expense in Year 2.
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