TAX4001 - Week 3 Writing Assignment - Part 3

Sheet1

Name:
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:					Amount Inherited to Kate and Sam Smith	$200,000
	1.	Taxable corporate bonds that pay 4.75 percent interest annually.			Tax Rate	30%
	2.	A high-dividend stock that pays 4 percent dividends annually but has no appreciation potential.			Capital Gain Tax Rate	15%
	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	$200,000*4.75%*(1-0.30)	$6,650
	2.	High-dividend stock	$200,000*4%*(1-0.15)	$6,800
	3.	Municipal bond	$200,000*3.5%	$7,000
Here are the three basic tax planning strategies, and the features of taxation each of them exploits:

Since the third investment option is generating more after tax returns, therefore, tax-exemption municipal boonds that pay 3.5% annually is the optimal investment option out of the three options.

The Timing strategy exploits the variation in taxation across time, for example the "real" tax costs of income decrease as taxation is deferred; the "real" tax savings associated with tax deductions increase as tax deductions are accelerated. The income-shifting strategy exploits the variation in taxation across taxpayers. This strategy utilizes the differences in taxation that prevails across every taxpayer. And finally, the conversion strategy exploits the variation in taxation across all activities.