Question

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 I completed the annual after-tax rates of return column for each investment opportunity I have identified.

Amount inherited to Kate and Sam smith	$200,000
Tax rate	30%
Capital gain tax rate	15%

1	Taxable corporate bonds that pay 4.75%interest annually	$200,000*4.7%*(1-0.30)	$6,650
2	A high dividend stock that pays 4% dividends annually but has no appreciation potential	$200,000*4 %*( 1-0.5%)	$6,800
	Tax- exemption municipal bonds that pay 3.5%	$200,000*3.5%	$7,000

Please, include in a letter to them a brief summary of the federal income tax rules regarding their situation a list of the three basic tax planning strategies

Relevent Info:

For this problem, assume their gross income is $185,300.

This year Kate got a new job, and the Smiths moved to a new city. The new job was located within the same state about 650 miles away from their old house. Before the move, the family went on a house hunting trip that cost them $700. They also hired a moving company for $2,800. On their way to their new house they spent $50 on meals, and $75 on a hotel room. They also stopped by an amusement park and spent $80 on tickets for the day.

The Smiths paid $12,000 in interest on their home mortgage this year, and $2,500 in real estate taxes on their new home. They also paid $1,200 in personal credit card interest, and Kate paid $850 in interest on student loans.   

Sam was hospitalized with a heart condition this year, which required him to undergo surgery. The Smiths incurred $25,000 in medical expenses as a result of Sam’s illness. Of this amount, $18,000 was reimbursed by the insurance company.

During the year the Smiths contributed $1,500 cash to the Salvation Army. Before their move, the family donated clothes and furniture that they had purchased for $650 to Goodwill. At the time of donation the items were worth $300. They also gave some old baby furniture to their friends that was valued at $150.

Sam Smith paid $200 in union dues for the year, and the family pays $250 for tax return preparation services.

Answer 1