ACCOUNTING-Nick and Jolene are married. Nick is 61 and retired

QUESTION

Nick and Jolene are married. Nick is 61 and retired in 2012 from his job withAmalgamated 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 their investments.They give you the following list of projected cash receipts for 2013:Jolene’s salary $13,000Nick’s pension—fully taxable 12,500Interest income 4,000Dividend income 2,500Social Security benefits 7,000Farmer’s Fund annuity 6,000In addition, Nick tells you that he owns a duplex that he rents out. Theduplex rents for 2013 are $18,000, and Nick estimates expenses of $22,000related to the duplex. The annuity was purchased 18 years ago for $20,000, andpays $500 per month for 10 years.Nick and Jolene’s investments consist of the following:6-month certificates of deposit (CDs) $100,0001,000 shares of Lardee’s common stock (currentmarket value = $7 per share, projected 2013dividend = $1 per share)—cost10,0002,000 shares of Corb Company common stock(current market value = $20 per share, projected2013 dividend = $.75 per share)—cost20,000a. Assuming that Nick and Jolene have total allowable itemized deductions of$12,350 in 2013 and that they have no dependents, determine their 2013 taxableincome and tax liability based on the projections they gave you.b. The 6-month CDs consist of two $50,000 certificates, both of which yield 4% interest.One CD matures on January 3, 2013. Nick’s banker tells him that he canrenew the CD for one year at 4%. Nick’s stockbroker tells him that he can purchasetax-exempt bonds with a yield of 3%. Nick would like you to determinewhether the tax-exempt bonds provide him a better after-tax return than the CD.c. Jolene is concerned that they are not getting the best return on their CorbCompany stock. When they purchased the stock in 2002, 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 eitherthe 3% tax-exempt securities or the 4% CD if it would be a better dealfrom an income tax viewpoint. Calculate the tax effect on their 2013 incomeof selling the shares, and determine whether they should sell the shares andinvest the after-tax proceeds in tax-exempt securities or the 4% CD. Do thiscalculation after you have determined the best option regarding the CD thatmatures in January.

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