Tax Problems in the Future - Case Study Example

Case Study Customer Inserts His/Her Name Customer Inserts Grade Course Customer Inserts Tutor’s Name 12th April 2013 The problems that the couple has now and those that it will have in the near future Some of the problems that the couple has now are: The couple has high credit card bills amounting to a minimum of $1,275.77yet they are expected pay for next terms’ school fees for their children. The school fee for both their children is $65,000. The couple is feeling strained because they have to pay the total amount due for the entire year. High tax rates: the couple’s annual income before tax is $220,000. This is a total of earnings from both David’s business and Jennifer’s salary. However, tax is totaling to $42,238. This leaves the couple with a net income of $177,762. This is income exclusive of other sources such as savings and savings accounts. This shows that the level of tax is high enough to consume 19% of their income. Unfortunately, the couple has little or no control over tax rate because it is determined by the government. The couple should worry that their income is still insufficient to cater for their expenses. For example, the couple’s expenses including mortgage, school fees, salary sacrifices, agent salary, lines of credit and loans amount to $269,291. This is against an income of $190,002. This leaves the couple with a negative income of $79,289. Although the couple has term deposits and savings accounts that can be used on emergencies, they are straining to make contributions to these savings accounts. Some of the problems that the couple will have in future are: In the future, the couple may have to worry about rising interest rates. Currently, they are only incurring 5.60% in mortgage interest rates yet they have only paid it for 3 years. This interest rate is expected to have doubled by the time that the loan is cleared. The couple has three loans excluding the credit card and the mortgage. The credit card is already posing a long term problem of payment default. Also, the loans are subject to changing interest rates and unmanageable monthly payments. For example, the current total annual loan repayments are $11,328.91. The couple is already living above their means and therefore, in the long term, it may prove difficult to manage the three loans. The couple is also risking to be listed in the Credit Reference Bureau if they continue to have high outstanding credit card bills (A Recipe for Right-Sizing Credit Facilities 2013). The couple should also worry about David’s younger brother who lives with them. The younger brother may pose as a future problem especially because he does not contribute to the household expenses. Also, the couple does not include his earnings as part of their income. It can become burdensome for the couple to be able to keep up with his expenses in future. That is, if he is unable to keep his source of income (Lewis,2013). The necessary steps the couple needs to take to improve and better their situation The couple can improve and better the situation by: Taking their children to a cheaper school. For example, they are spending $65,000 p.a. in school fees while they could pay less in public schools. They should reduce their credit facilities. The couple should refrain from undertaking any other loans after they finish repaying their first loan. The couple should also manage their credit card bills in order to reduce the current outstanding bill of $36,450.55. They should do this by increasing their monthly repayment amounts. The couple should also reduce the amount of salary that they sacrifice. For example, both David and Jennifer sacrifice $15,000. If they reduced this figure to $10,000 then they can use $5,000 to clear their credit card bill. Theyshould also consider coming to an agreement with David’s younger brother so that he can be assisting them with household expenses. Considering that he is not paying rent and he is earning $21,500, then he is in a position to assist in miscellaneous expenses. The couple should budget their monthly account payments. They should ensure that they distribute their income in a manner that would satisfy all their bills and expenses. Therefore, they should avoid contributing too much on one bill and neglecting the other. For example, it has been observed that the couple has been neglecting their credit card payments yet they pay huge amounts of school fees (Managing your debt: Personal loans & Overdrafts 2013). The couple should ensure that there is money in their accounts to cater for debit orders, stop orders and cheques. This can reduce instances whereby they get charged or penalized for unpaid effects. They should ensure that the credit facilities do not exceed the allowable or the arranged limit. For example, they have three loans, a credit card and a mortgage. Therefore, instead of adding more credit facilities, they should consider reducing the ones that are already in place. Before acquiring the credit facilities, the couple should ensure that it makes calculations on the estimated cost of the credit. The calculation should include the number of payments that are expected to be made during the life of the facility and the monthly repayments. They should then compare the cost of loan to the cash price of the product. Such comparison would enable the couple to make rational decision on the best method of acquiring a given product. In doing so, it is important to consider the interest rate being applied on the credit facilities in comparison with other financial institutions (Barclays: Debt management 2013). Explain why those steps are needed The above steps are needed because the couple needs to reduce the burden it has with loans. For example, if they reduce the number of loans they have, then more money would be available to clear other bulls such as credit cards. If they reduce the burden they have on other credit facilities such as credit cards and mortgages then they can have more cash to invest in other financial items such as shares and stocks. This can increase their income level. Clearing outstanding credit card bills would also help the couple to avoid being listed at the Credit Reference Bureau. The couple needs to enroll their children in cheaper schools because the current bill is high and the level of income is low. The couple is already living above their means. Therefore, they need to reduce unnecessary expenses by seeking cheaper schools. By consulting with David’s younger brother to assist with household expenses, the couple will have reduced the burden of miscellaneous costs. The couple should reduce their salary sacrifices because such a move increases the amount of money available to clear their credit card bills. The couple should also budget their monthly payments in order to reduce instances of impulse or unnecessary spending. They should ensure that there is money in their accounts to cater for standing orders, cheques and debit orders in order to reduce charges as a result of dishonored payments. When such payments are honoured they reduce instances of accounts getting overdrawn. Therefore, the couple would not have to worry about getting listed on the Credit Reference Bureau due to payment defaults. By maintaining their credit facilities within the allowable limits, the couple would be able to manage their expenses. Illustrate the expected outcomes from taking those steps (How you can benefit from sorting out your money 2013). By taking the above steps, the couple would have reduced the current outstanding credit card bill. For example, if the couple managed to save $5,000 per annum from their salary sacrifices, this amount could be used to reduce credit card bill to $31,450.55 from the current bill of $36,450.55. This is exclusive of the minimum payment that the couple makes. By enrolling their children in cheaper schools, the couple is expected to save more money to be able to make other investments and to clear their credit card bills. For example, if the couple can spend $40,000 to $50,000 in school fees then it can save $10,000 to $25,000. If they manage to save the latter, then $10,000 can be used to clear part of their credit card bill or one of their loans and the rest can be invested elsewhere. If the couple clears the first loan and does not take up another one, then they can reduce their annual expenses by $4,848.20 inclusive of interest expenses. This money can either be used to reduce the other loans or credit card, or it can be used to invest in items such as shares. The couple can come to an agreement with David’s younger brother so that he contributes at least 5% of his income to household expenses. This would amount to $1,075 which would reduce the burden that the couple has. Regarding the will, if David executes his mother’s will, then he can end up receiving a huge amount of money that can reduce the mortgage financing. When the couple learns to manage its monthly payments, it would have more disposable income to invest. By maintaining their credit facilities within the allowable limit, the couple can be able to have more money available for investments Assumptions It is assumed that David undertook execution of his mother’s will. This would increase the level of disposable income that the couple could use to clear their mortgage It is also assumed that David’s younger brother is not schooling or, if he is schooling, his tuition is not being paid by his brother and his wife. It is assumed that David’s business does not incur other expenses because the only expenses mentioned relate to personal/ family expenses. Therefore, tax could only be charged on the couple’s salary and not on net income after deduction of expenses. References A Recipe for Right-Sizing Credit Facilities: Use these 5 steps to avoid the pitfalls when reducing credit facilities 2013, viewed 14 May 2013, www.fico.com Barclays: Debt management 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html How you can benefit from sorting out your money 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html Lewis, M 2013, Debt Problems, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html Managing your debt: Personal loans & Overdrafts 2013, viewed 14 May 2013, file:///C:/Users/victoria/Desktop/bluetooth_content_share.html Read More