Financial Planning, Taxable Income, Effect of Education on People Income - Assignment Example

Short term goals

Goal

Priority

Target Date

Cost Estimate

Complete the course work for PhD

High

Jan. 2016

$600

Celebrate Birthday of son

Medium

Feb. 2016

$ 1400

Purchase books and study materials

Medium

April 2016

$ 1000

Repair the bike

Low

May 2016

$400

Question 3

• Pay off the depts. from all students within a year.

Save $800 for the two years to purchase a bike.

Save money for rent and food to buy a laptop.

• Pay off all the loans before the MBA degree.

Look for a feasible education loans for the daily MBA

Shift to a cheaper place and near the university so as to save money

• Begin to save for education for the children

Plan out insurance schemes

Plan to save to buy a house

• Plan for the college for the child

Save to keep a maid to look after the house

Investing in avenues or real estate to get better returns

Question 4

The different life cycles will change our financial needs and goals. The different stages of life are early childhood, high-school and college, family formation, career development, pre-retirement and retirement. Our finance, expenditure and requirement changes as we move through the different life cycles. Hence the need for proper planning helps to meet our financial goals with the limited finance available with us. Finance goal can only be achieved through good financial planning.

Question 5

Real GDP is an inflation-adjusted assessment that reveals the value of all good and service manufactured during the year. Increase in GDP indicates a growth trend and that things are favourable.

Unemployment usually indicates that low jobs are available. A slow GDP indicates that the jobs are scarce. Inflation represents the upward movement in the economy. It raises the prices of commodities and decreases the value of money over a period of time.

Inflation plays a very vital role in financial planning. Inflation can be measured through the consumer price index (CPI). It affects both what we spend and what we earn. We can plan our finances based on inflation, unemployment and real GDP. High inflation results to high interest rate; therefore due to these high interest rates we can plan our personal needs. For proper financial planning one has to understand inflation and real GDP.

Question 6

High inflation result into high interest rates. It also results to high security prices. During high inflation almost all the expenditure escalates making financial planning very necessary and effective. During high inflation only those that can stick with their financial plan can manage to save

Question 7

Earning large income depends on age level, education, geographical location, hard work, dedication, commitment and well thought out set of financial plans. All the above factors have some impact on personal income. The pay structure of an employee also varies from employee to employee depending on age, education, experience and according to the location. Salary is high in metro city because of the high cost of living.

Question 8

We can change our planning goals based on the job market. Therefor one should not expect to stay in one field forever. Hence, one can set your plan according to the job market situations. To repackage myself for job in different field I should;

• Analyse my own skills and identify the strength areas
• Identifying the companies in the related field
• Considering how I can make difference in the company.
• Net working
• Developing resume emphasizing on my key skills

Question 9

• Some important career factor that he should consider when looking for job include, salary, opportunity for advancement, his transferrable skills that could apply for the new job, availability of benefits, available training programs, types of industries and company that interest him.
• Personal factors that he needs to consider are personal lifestyle and if he is willing to stay away from his children.
• He should consider a lower-paying job on a short-term basis and at the same time look for a managerial job in another field. He cannot afford to wait out the recession; his funds will run out in a few months. This two-pronged approach is therefore preferable to one or the other. A job at a lower salary, particularly one with good benefits and a tuition reimbursement policy, would allow him to finish his degree or obtain other job training to qualify for a better position. Because he has no dependents, he should be able to cover his living expenses, although he may have to cut back on some discretionary expenses.
• The current employees can ensure that they broaden their base of experience. They should gain the transferable skills and skills to work in other sectors rather than working on only one job for a very long period of time. They should study the industry trend so that they learn the new requirement that the industries requires.

Question 10

The level of education affects people’s income. The level of education usually determines the job position that a person acquires. A person with high bachelor’s degree can do more diverse work than someone with no high school diploma. A person with a professional degree is more experienced and learned than someone with bachelor’s degree. The salary of someone with professional degree is more qualified and hence is easily employed. They are usually given the promotion to high job levels and hence more annual income than those with bachelor’s degree

Solution to Chapter 3

Question 1

Tax calculation for Sarah Adam’s is as follows following 2013 tax year. The amount of standard deduction amounts in page 2 form 1040 as illustrated in the top left margin with the line 42 showing the exemption. Exhibit 3.3 shows the tax rate schedules that will help in determining Sarah’s tax liability.

. a.Gross Income:

Salary$33,500

Dividends 800

Interest on savings account 250

Rental income 900

Total gross income$35,450

b.Tax-Exempt Income:

Gift from Mother $ 500

Child support from ex-husband 3,600

Loan from bank 2,000

Interest on state government bonds 300

Total tax-exempt income $6,400

Question 2

Salaries

55000

Plus: interest income

142

Gross Income

55142

Less: Adjustments to income

0

Adjusted Gross income

55142

Less: Standard deduction

5800

Less: Excemption

3700

Taxable Income

45642

Tax Liability (34500*0.15) + 0.25(45642-34500)

7960.5

Less Taxes withheld

3910

Tax due

4050.5

Question 3

Cindy would pay the following capital gains taxes according to the regulations for capital gains in effect in 2013. Please note that no mention is made of interest or dividends earned during the time these securities were held, and we will disregard these items for this problem. Interest or dividends earned increase a security's basis, or the starting amount for the capital gains calculation. This would serve to lower the capital gains realized, and thus lower the capital gains taxes due on the security.

a.Sale price $1,200

Purchase price 1,000

Capital gain $ 200

Tax due ($200 × .28) $ 56

(The stock was held for less than 12 months; therefore the gain is a short-term capital gain and taxed at ordinary income tax rates.)

b.Sale price $4,000

Purchase price 3,000

Capital gain $1,000

Tax due ($1,000 × .15) $150

(The bonds were held longer than 12 months but less than 5 years. The gain is a long-term capital gain and is taxed at 15% for someone in her tax bracket.)

c.Sale price $1,000

Purchase price 1,500

Capital loss ($ 500)

Tax savings * ( $500 × .28) ($140)

Question 4

• Alan can use Form 1040EZ because his income is only from eligible sources and he has less than $1,500 in interest income. (Generally, tuition scholarships and grants are generally considered tax exempt, while those that go for room and board are not.)

Salaries

30250

Taxable interest

185

Adjusted gross income

30435

less amount if No one can claim

9500

Taxable income

20935

Income tax withheld

2600

Total payments and credits

2600

Tax (from tax table using taxable income)

2715

Amount you owe

115

• In order to deduct his contribution for a traditional IRA, Alan would have to use Form 1040A or the standard 1040 long form. The Roth IRA (available beginning 1998) is not tax deductible, so the illustration for part b assumes a contribution to a traditional IRA.

salaries

30250

plus Taxable interest

185

plus Ordinary dividend

150

Total income

30585

Less IRA deduction

5000

Adjusted gross income

25585

less itemized deduction

5800

19785

exceptions

3700

Taxable income

16085

Tax

1987

Question 5

Assuming “pre-tax income” to mean “taxable income,” the impact of an extra $1,000 deduction vs. a $1,000 tax credit for a single taxpayer in the 25% tax bracket (as of 2011) is as follows:

a. $1,000 b. $1,000

DeductionCredit

(1) Taxable income$40,000.00$40,000.00

Less: Deduction from income 1,000.00 0

Income before taxes $39,000.00$40,000.00

Taxes for a:

$4,750 + [.25($39,000 − $34,500)]$5,875.00

Taxes for b:

$4,750 + [.25($40,000 – $34,500)]$6,125.00

Less: Tax credit 0 1,000.00

(2) Taxes due $5,875.00 $5,125.00

(3) After-tax income [(1) – (2)] $33,125.00 $34,875.00

As can be readily observed, a tax credit reduces the taxes due (line 2) more than does a deduction, thus causing the after-tax income (line 3) to be greater with the $1,000 credit than with the $1,000 deduction. A tax deduction reduces taxable income (a larger number) whereas a tax credit reduces the tax due (a much smaller number), so dollar for dollar, the tax credit has a greater impact.

Question 6

Ralph and Diane should get all their documentation in order for these items, particularly those for cash receipts and cash payments. This is because tax audits question whether all income received has been properly reported and if the deductions claimed are legitimate and for the correct amounts. They should contact their CPA or other tax preparer if they have to seek both their advice and guidance through the audit. If they did not have a professional prepare their return, they would still do well to consult with one before the audit. In fact, they might want to seek the counsel of a tax attorney. cvIf the Hearsts do not agree with the IRS examiner on disputed items, the taxpayer can meet with the examiner's supervisor to discuss the case further. If there is still disagreement, they can appeal through the IRS Appeals Office. If they do not wish to use the Appeals Office or if they disagree with its findings, they may be able to take their case to the U.S. Tax Court, U.S. Court of Federal Claims, or the U.S. District Court where they live. [For more information, IRS Publication 1 deals with "Your Rights as a Taxpayer" which can be printed off from the IRS Web site, www.irs.gov.]

• Taxable income is calculated as follows:

Gross wages and salaries$50,770

Dividends and interest $610

Capital gains realized $1,450

Less: Capital losses $3,475

Net capital gains ($2,025)

Passive income—limited partnership 200

Gross income$49,555

Less: Adjustments to Gross Income

IRA contributions $5,000

Alimony paid 6,000

Total Adjustments (11,000)

Adjusted gross income (AGI) $38,555

Now total the itemized deductions and compare to the standard deduction. Subtract the larger of these two numbers from the AGI.

Itemized deductions:

Mortgage interest $5,200

Property taxes 700

State income taxes 1,700

Charitable contributions 1,200

Job and other expenses

[875 – (38,555 × .02)] 104

Total itemized deductions (8,904)

Standard deduction for married filing jointly (for 2013) (11,600)

Less: Personal exemptions (3 × $3,700) (11,100)

Taxable income $15,855

Exclusions:

Medical expenses of $1,155 are less than the 7.5 % minimum of AGI ($38,555 × 0.075 = $2,892) allowed by law before deductions can be taken.

Sales tax and personal interest expenses are not allowed. Social Security taxes are not deductible.

Job and other qualified miscellaneous expenses are limited to the amount which is over 2% of AGI.

Interest paid on car loans and credit cards are generally not tax deductible.

The standard deduction of $11,600 was used because it was greater than this family's itemized deductions of $8,904. The IRA contribution was assumed to be to a traditional deductible IRA, as contributions to Roth IRAs are not deductible.