Early next year, Kate and Sam Smith will inherit $200,000. Kate and Sam are trying to decide how to invest this money and have asked you, their tax accountant, to look into some potential investment opportunities. Please see the attached excel spreadsheet, where you will complete the annual after-tax rates of return column for each investment opportunity you have identified. Include a paragraph on the spreadsheet where you list the three basic tax planning strategies, and the features of taxation each of them exploits.
Kate and Sam Smith Investment Opportunities
Here are the three different investment opportunities you have identified for the Smiths, all with the same amount of risk:
1. Taxable corporate bonds that pay 4.75 percent interest annually.
2. A high-dividend stock that pays 4 percent dividends annually but has no appreciation potential.
3. Tax-exempt municipal bonds that pay 3.5 percent annually.
Kate and Sam have a marginal tax rate of 30 percent (capital gains rate of 15 percent).
Investment Choice Computation After-Tax Return
1. Corporate Bond
2. High-dividend stock
3. Municipal bond
Here are the three basic tax planning strategies, and the features of taxation each of them exploits:
