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Introduction Don Trumpette and his wife Sabrina are beginning to take the necessary steps to reach their financial goals. In an effort to identify weak areas of their financial portfolio, they have provided their personal and financial information for evaluation by the MoneyTree program. The results of the evaluation can be found in the Easy Money report that the software produced, which has been analyzed by Team 4 in the sections to follow. During our analysis, four key problem areas were identified along with recommended corrective actions. Income Tax Problems The Trumpette’s currently earn $65,469 in taxable income, which means that their marginal tax rate is 15% based on the 2011 tax rates. However, they are just $3,531 away from earning enough to push them into the next tax bracket of 25% (if taxable income becomes greater than $69,000). As such, the Trumpette’s should do what they can to reduce their taxable income through investments and retirement contributions. Based on their taxable income and their income tax due and payable (excluding FICA) of $7,935, we find their average tax rate is 12.12%. To reduce the amount of taxes they pay in each given year, the Trumpette’s should try to get their marginal rate as close to their average tax rate as possible by lowering their marginal rate as much as legally allowable. However, it is important to note that in this case, for the Trumpette’s to lower their marginal tax rate to 10% (the next lowest tax bracket), they would need to have taxable income of $17,000 or less, which is not a realistic goal. At the moment, the Trumpette’s are already making use of several deductions that can help decrease their taxable income, including mortgage interest, charitable donations, medical expenses, property taxes, and miscellaneous decisions. However, they could be doing more to build their portfolio and reduce taxable income. Based on the Easy Money report, it is evident that the Trumpettes have not diversified their accounts as much as they should and that they have not taken advantage of tax-deferred, tax-free, or tax- deductible accounts which would allow them to decrease their taxable income. For instance, Don has $22,699 set aside in a tax-deductible 401K retirement account, but is not currently contributing to the account. We recommend Don make the maximum contribution to this retirement account each year so that he can reduce his taxable income and continue to prepare for retirement. Additionally, Sabrina needs to open a SEP-IRA or a Keogh Plan that will allow her to save on her taxes and save for retirement at the same time. Both plans are tax-deductible, however the SEP-IRA may be the better option for Sabrina
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This note was uploaded on 03/07/2012 for the course FIN 6108 taught by Professor Nye during the Fall '11 term at University of Florida.

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