Discussion Case 1
Shu Chang, 22, has just moved to Denver to begin her first professional job. She is concerned about her finances; specifically, she wants to save for "a rainy day` and a new car purchase in 2 years. Shu's new job pays 530,500, of which she keeps 524,000 after taxes. Her monthly expenses total $1,600. Shu's new employer offers a 401(k) plan and matches employees' contributions up to 6 percent of their salary. The employer also provides a credit union and a U.S. Savings Bond purchase program. Shu also just inherited $5,000.
Shu's older brother, Wen, has urged Shu to start saving from day one" on the job. Wen has lost a job twice in the last 5 years through company downsizing and now keeps 535,000 in a 2 percent money market mutual fund in case it happens again. Wen's annual take-home pay is $48,000.
Shu has started shopping around for accounts to hold her liquid assets. She'd like to earn the highest rate possible and avoid paying fees for falling below a specified minimum balance. She plans to open two accounts: one for paying monthly bills and another for short-term savings.
Questions
1. Name at least three ways that Shu could automate her asset management. Suggest at least one option for retirement savings, general savings, and general convenience.
2. What major factors should Shu consider when selecting a checking and/or savings account?
3. Why does Shu need an emergency fund? Assuming she wants to follow her brother's lead, how much emergency savings should she try to set aside? What type of account would you recommend for her emergency fund?
4. Comment on Wen's use of liquid assets. How is his savings philosophy both risky and con-servative? What is the real after-tax rate of return, assuming a 3 percent inflation rate and 25 percent marginal tax bracket?
5. Shu has narrowed her "savings" account choices to a standard checking account paying 0.25 percent, a money market deposit account (MMDA) paying 1 percent and a money market mutual fund (MMMF) earning 1.75 percent. Which liquid asset vehicle would you recommend for paying monthly expenses, and which would you recommend for saving for the car down payment? Explain the advantages and disadvantages associated with each choice.
6. Shu has heard that some local auto dealerships may require a cashier's check for the down payment. Why is a cashier's check preferable to a certified check?
Discussion Case 2
Austin and Anya Gould are a middle-aged couple with two children, Rusty, age 13, and Sam, age 11, whom they adopted this year. They also bought a new home in the area to give the children a yard in which to play. The Goulds have an extensive retirement portfolio invested primarily in growth-oriented mutual funds. Their annual investment income is only $500, none of which is attributable to capital gains. Austin works in the banking industry and receives an annual income of $32,500. Anya, who owns the only travel agency in town, makes about $40,000 a year.
The Goulds give extensively to charities.They also have tax deductions from their mortgage interest expense, business expenses, tax expenses, and unreimbursed medical expenses, as follows:
|
Health insurance (provided by Anya)
|
$2,200
|
|
Rusty's braces
|
$1,500
|
|
Mortgage interest expense
|
$7,200
|
|
Real estate taxes
|
$900
|
|
Investment and tax planning expenses
|
$1,450
|
|
Other medical expenses
|
$3,600
|
|
Charitable contributions
|
$3,500
|
|
Moving expenses
|
$3,000
|
|
Austin's unreimbursed business expenses
|
$2,300
|
|
Qualified adoption expenses
|
$6,700
|
|
State taxes withheld and owed
|
$4,000
|
Remember that Anya has some special tax expense deductions because she is self-employed. Be sure to include them when estimating their 2014 taxes.
Questions
1. Calculate Anya's Social Security and Medicare taxes. Calculate how much of these taxes are deductible.
2. Calculate the Goulds' total income and adjusted gross income for the year.
3. Are the moving expenses deductible? Why or why not?
4. Should the Goulds take the standard deduction, or should they itemize? What is the amount of their deduction?
5. What tax form will the Goulds use? Why?
6. What credits might the Goulds use to reduce their tax liability?