ScholarMatic: Explanation & Answer
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Nick and Jolene are married. Nick is 61 and retired in 2010 fromhis job with Amalgamated
Company. Jolene is 56 and works part-time as a special educationteacher.
Nick and Jolene have a substantial amount of investment savings andwould like to
reorganize it to achieve the best after-tax return on theirinvestments. They give you
the following list of projected cash receipts for 2011:
Jolene’s salary $13,000
Nick’s pension—fully taxable 12,500
Interest income 4,000
Dividend income 2,500
Social Security benefits 7,000
Farmer’s Fund annuity 6,000
In addition, Nick tells you that he owns a duplex that he rentsout. The duplex rents for
2011 are $18,000, and Nick estimates expenses of $22,000 related tothe duplex. The
annuitywas purchased 18 years ago for $20,000, and pays $500permonth for 10 years.
Nick and Jolene’s investments consist of the following:
6-month certificates of deposit (CDs) $100,000
1,000 shares of Lardee’s common stock (current market
value ¼ $7 per share, projected 2011 dividend ¼ $1 pershare)—cost
10,000
2,000 shares of Corb Company common stock (current
market value ¼ $20 per share, projected 2011 dividend ¼ $.75 pershare)—cost
20,000
a. Assuming that Nick and Jolene have total allowable itemizeddeductions of
$12,350 in 2011 and that they have no dependents, determine their2011 taxable
income and tax liability based on the projections they gaveyou.
b. The 6-month CDs consist of two $50,000 certificates, both ofwhich yield 4% interest.
One CD matures on January 3, 2011. Nick’s banker tells him that hecan
renew the CD for one year at 4%. Nick’s stockbroker tells him thathe can purchase
tax-exempt bonds with a yield of 3%. Nick would like you todetermine
whether the tax-exempt bonds provide him a better after-tax returnthan the CD.
c. Jolene is concerned that they are not getting the best return ontheir Corb Company
stock. When they purchased the stock in 2000, the $.75 per sharedividend was
yielding 10% before taxes. However, the rise in market value hasfar outpaced the
dividend growth, and it is yielding only 3.75%, based on thecurrent market value.
Jolene thinks they should sell the stock and purchase either the 3%tax-exempt
securities or the 4% CD if it would be a better deal from an incometax viewpoint.
Calculate the tax effect on their 2011 income of selling theshares, and determine
whether they should sell the shares and invest the after-taxproceeds in tax-exempt
securities or the 4% CD. Do this calculation after you havedetermined the best
option regarding the CD that matures in January.
ScholarMatic: Explanation & Answer
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