Problem
It is late 2014, and you are a successful executive working in New York for a large company. Tomorrow morning you will have the opportunity to negotiate receiving a $100,000 bonus at the end of the year or an amount of deferred salary in 3 years. Both you and your employer can earn a before-tax rate of return of 10%. Your employer's combined federal and state marginal tax rate is 40% and is expected to remain constant throughout the 3 year period. Your combined state and federal marginal tax rate is 45%. However, you are being transferred to Florida (which does not have an individual income tax) at the beginning of next year. Accordingly, you expect your marginal tax rate to drop to 35% in 2015 and remain constant through 2017.
a. How much deferred salary would your employer be willing to pay you in three years?
b. How much deferred salary would you be willing to accept from your employer in three years?
c. What should you do?