Assignment 2: Tax Issues Associated with Financial Planning
Understanding the tax consequences of your financial planning decisions is very important. These decisions may sometimes have life-long consequences in addition to a one-time result.
For example, when a person decides to save for retirement, there are tax consequences for each year when money is added to the account as well as when it grows. There are additional consequences later when that person decides to retire and use the money to live on.
This assignment looks at another example of tax issues associated with financial planning. You will look at the use of tax-exempt investment instruments such as municipal bonds, as an alternative to traditional investments, and corporate bonds or stocks.
Consider the following:
Bill Smith, a manager of a restaurant/bar in Los Angeles, is in the 25% marginal tax bracket and pays an additional 5% in taxes to the state of California. Bill has $20,000 invested in corporate bonds which is currently earning an average annual return of 7.5%.
Additionally, Bill also has another $20,000 invested in municipal bonds from the city of Los Angeles that are being used to redevelop depressed areas downtown. These bonds pay an average return of 5.4%.
Assume that in both cases, Bill earns the same returns as calculated on both the corporate and municipal bonds each year for the next 15 years.
Answer the following:
- What is the after-tax return on Bill’s corporate bonds for the current year?
- What is the after-tax return on his municipal bonds for the current year?
- Which investment earns more returns: corporate or municipal bonds?
- What would the balance in each account be at the end of the fifteenth year?
Present the calculations and answers in Excel spreadsheet format or in Word format. Write the interpretation of results in a Word document. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M2_A2.xls and LastnameFirstInitial_M2_A2.doc.
By Wednesday, October 14, 2015, deliver your assignment to the M2: Assignment 2 Dropbox.
| Assignment 2 Grading Criteria |
Maximum Points
|
| Correctly computed the tax calculations showing the formulae and the necessary steps. |
32
|
| Analyzed the calculations to draw valid conclusions on the investments. |
48
|
| Wrote in a clear, concise, and organized manner; demonstrated ethical scholarship in accurate representation and attribution of sources; displayed accurate spelling, grammar, and punctuation. |
20
|
| Total: |
FINANCIAL PLANNING
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file1.docx preview (209 words)
Running xxxxx TAX ISSUES xxxxxxxxxx xxxx xxxxxxxxx PLANNING
TAX xxxxxx ASSOCIATED xxxx xxxxxxxxx PLANNING
xxxxx
xxxxxxxxxxxx
xxxxxxx
xxxxxxxxxx’x xxxxx
xxxxx
Question xxxx What is the xxxxxxxxx xxxxxx xx xxxx’x corporate xxxxx xxx the current xxxxx
Returns xx xxxxxxxxx bonds will be xxxxx by:
xxxxxxxxxxxxxxxxx
xxx for xxx xxxxxxx =$1500*25%=375, this xxxxxxxxx xxx xx the marginal xxxxxxxx
xxxxxxxxxx xxx xxxxxxx xx the state of xxxxxxxxxx xxxx be xxxxx by ($1500-$375)*5%=56.25
Total tax payable =$56.25+$375=$431.25
xxxxxx tax xxxxxx on xxxxxxxxx xxxxx =$1500-$431.25=$1068.75
Question xxxx xxxx is xxx xxxxxxxxx xxxxxx xx xxx municipal bonds xxx xxx xxxxxxx year?
xxxxxxx on municipal xxxxx =$20000*5.4%=$1080
Therefore tax xx xxx marginal bracket xxxxxxxxxxxxxxx
Tax xxxxxxx to the state of xxxxxxxxxx xxxx xx xxxxx xx xxxxxxxxxxxxxxxxxxxx
Total tax xxxxxxxxxxxxxxxxxx
xxxxx xxx xxxxxxx will be xxxxx by $1080-$310.5=$769.5
Question xxxxxx xxxxx xxxxxxxxxx earns xxxx
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Calculation in excel file with formula embeded in cells and one page note in word file
body preview (16 words)
If you xxxx any xxxxxxxx or xxxxxxx xxxxxxx to xxxxxxxxxxx xxxxxx inbox xx xx resolve. xxxxxxx
file1.doc preview (204 words)
xxxxxxxxx xxxxxxxxx
Tax xxxxxx xx Financial xxxxxxxxx
xxxxxxxxx
xxx purpose is to describe xxx impact of tax on xxxxxx xxxxxxx It is xxxxxxxxx that the tax deduction xxxxxxx xxx xxxxxx xxxxxx xxxxxx on xxxxxx
xxxxxxxxxxxxxxx
xxx xxxxxx xx xxxxxxxxx xxxx xx xxxxxxx xx tax xxxxxxxxx xx xxx xxxx xxx which xxxxx xx total 30%, therefore xxx after xxx xxxxxx will be 7.5% x xxxxxxx x xxxxxx xxxxx the after tax xxxxxx and before tax return on municipal bond are xxx xxxx xx xxxxx is no tax xxxxxxxxx therefore xx is xxxxx xx 5.4%. The return xxx year xxx corporate bond is xxxxxxxxxxx = xxxxxx while xx other bond it is 20000*5.4% x $1080, therefore xxx municipal bond earns more xx xxx xxx xxxx xxxx as compared xx corporate bond. xxxxx xxxxxx xxx xx years xx xxxxxxxxx xxxx xxxx be xxxx xxx x xxxxxx xxx xx municipal bond xx xxxx be xxxx *15 = xxxxxxx therefore xxx total xxxxxxx in corporate xxxx balance will xx $35750 xxxxx in other bond xx will be $36200.
xx can be easily concluded that xxx
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file2.xls preview (61 words)
xxxx xxxxx financial planning
xxxxxxxxxxxxxxxxxxxxxxxxxx
| Bill xxxxx financial planning | |
| xxx : x | |
| 5.25% | |
| xxxxx xxx xxxxxx xxxx’x corporate bonds | $1,050 |
| Ans : 2 | |
| After tax xxxxxx Bill’x xxxxxxxx xxxxx | $1,080 |
| Ans : 3 | |
| xxxxxxxxx xxxxx earn more return. | xxxxxx |
| xxx : x | |
| Corporate bonds | |
| Return per xxxx | x 1,050 |
| xx year return | x xxxxxx |
| add Original investment | x xxxxxx |
| Balance xx 15 year xxx | * xxxxxx |
| xxxxxxxxx Bonds | |
| xxxxxx xxx year | * 1,080 |
| xx xxxx xxxxxx | * xxxxxx |
| xxx xxxxxxxx xxxxxxxxxx | * 20,000 |
| xxxxxxx at 15 xxxx end | x 36,200 |
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