The Jobs and Growth Tax Relief Reconciliation Act of 2003).?

Katey - 2007-07-30 16:38:25 - Investing

Bernie and Pam Britten are a young married couple beginning careers and establishing a household. They will each make about $50,000 next year and will have accumulated about $40,000 to invest. They now rent an apartment but are considering purchasing a condominium for $100,000. If they do, a down payment of $10,000 will be required. They have discussed their situation with Lew McCarthy, an investment advisor and personal friend, and he has recommended the following investments: The condominium - expected annual increase in market value = 5%. Municipal bonds - expected annual yield = 5%. High-yield corporate stocks - expected dividend yield = 8%. Savings account in a commercial bank-expected annual yield = 3%. High-growth common stocks - expected annual increase in market value = 10%; expected dividend yield = 0. Calculate the after-tax yields on the foregoing investments, assuming the Brittens have a 28% marginal tax rate (based on Public Law 108-27

Best Answer:

First, I have to say that I think you'd have more people willing to help if it appeared that you had made some effort on this yourself. (E.g. if you said "I know municipal bonds are federal tax free, so the after-tax yield on those would be the full 5% that they earn since there's no tax and I know that........but I don't understand about stocks or the condominium.) When you just dump the whole homework problem in here, it looks like you're too lazy to even try it yourself. Most people here would be happy to HELP if they can but don't appreciate being asked to DO IT all for you. That would also defeat the purpose of the assignment because the whole point of education is to learn how to do things yourself so you aren't dependent on others and can actually help other people. OK, end of lecture. As I understand the tax rules: - muni-bond interest is federal tax free - capital gains (stock price appreciation) are taxed at 15% for people in marginal tax brackets that are higher than 15% IF the stock is held more than 1 year before selling it - dividends are the same but I think you qualify for the lower rate if you own the stock for at least 90 days - bank interest is fully taxable at the marginal rate - capital gains on home price appreciation are tax-free if you live in the house for at least two years (the rules are actually more complicated than that, but that's a simplified version). Of course, in real life, when evaluating a home as an investment, you have to also consider mortgage interest, real estate broker fees, attorney fees, land transfer fees, property taxes, etc. when determining the true return. So, for example, the savings account earns 3%, but 28% of that is taken for taxes, so you only get to keep 72%, meaning your after-tax yield is a mere 2.16% (72% of 3%)...which is less than inflation most years, so obviously not a good long term investment. I'll let you calculate the others.

Answer:

First, I have to say that I think you'd have more people willing to help if it appeared that you had made some effort on this yourself. (E.g. if you said "I know municipal bonds are federal tax free, so the after-tax yield on those would be the full 5% that they earn since there's no tax and I know that........but I don't understand about stocks or the condominium.) When you just dump the whole homework problem in here, it looks like you're too lazy to even try it yourself. Most people here would be happy to HELP if they can but don't appreciate being asked to DO IT all for you. That would also defeat the purpose of the assignment because the whole point of education is to learn how to do things yourself so you aren't dependent on others and can actually help other people. OK, end of lecture. As I understand the tax rules: - muni-bond interest is federal tax free - capital gains (stock price appreciation) are taxed at 15% for people in marginal tax brackets that are higher than 15% IF the stock is held more than 1 year before selling it - dividends are the same but I think you qualify for the lower rate if you own the stock for at least 90 days - bank interest is fully taxable at the marginal rate - capital gains on home price appreciation are tax-free if you live in the house for at least two years (the rules are actually more complicated than that, but that's a simplified version). Of course, in real life, when evaluating a home as an investment, you have to also consider mortgage interest, real estate broker fees, attorney fees, land transfer fees, property taxes, etc. when determining the true return. So, for example, the savings account earns 3%, but 28% of that is taken for taxes, so you only get to keep 72%, meaning your after-tax yield is a mere 2.16% (72% of 3%)...which is less than inflation most years, so obviously not a good long term investment. I'll let you calculate the others.