Federal income tax case studying!?

I am studying federal income tax right now and I am an accounting major. Professor gives us case assignment, and I don't know how to figur it out because it's a lot of information involved such as mortgage, municipal bonds, stock, and CD. Professor wants me to look at this case and answer those questions as tax consultant. However, I don't have any idea how to find answer.


Can someone give me advice. Thanks!!Federal income tax case studying!?
Finding and understanding the tax laws well enough to prepare a return is a totally different thing from being a tax consultant. Well, at least it is from where I stand.





This should go without saying...you don't normally want lose money just to save on taxes...there is a bigger picture. However, it might surprise you when you start your practice.





I think that this is the view your professor wants you to answer in...is it better to have a Muni (non-taxable) at a lower rate or a CD (taxable) at a higher rate. And, is it better to invest in other venues rather than paying off the mortgage. Think about it...does it make sense to pay (let's say) 7% on a mortgage while investing in other things with a 3% return? Sometimes it does somtimes it doesn't...you have to run the numbers.





The bottomline is what matters to a tax consultant...so what if you pay more tax as long as you end up with more money in your pocket in the end. That is a tax consultants job...it is a combination of a tax preparer and a financial planner.





It might also be surprising to you the willingness of people to pay interest instead of taxes...even if it costs them more money. And, yes most people if they pay off their mortgage will use that extra money to get in debt again.





EDIT:


Let's start simple...because it is that simple. Tax situations generally only get complex when you make them that way (you will learn this too).





If you are at this level you probably know all the rules you need for this problem, it is simply a matter of applying those rules. The tax laws aren't complex in this problem.


But, if you don't IRS.GOV under forms Pub. 17, everything you will need is right there.





Many people make the process harder than it has to be...it is simple if you do it one step at a time. A lot of math but simple.





1) Calculate the base tax rate. (that is one step at a time too)


2) Then you will need to calculate the actual cost of the loan (interest paid - tax savings from the mortgage interest= actual cost). You will have to use the base tax rate.


3) You will need to calculate the normally tax free income from the Muni and compare it to the actual cost of the loan. Which one is better?


4) And because it is your job...you need to re-calculate the numbers using the higher CD rate (that is taxable) instead of the Muni. Which of these is better?


5) Just because we are gonna be really good...you need to compare the results if he got the mortgage for 6% and paid it on the property that has 10%.


Once these steps are done you will know the following:


1) What happens doing nothing.


2) What happens with a Mortgage and a Muni


3) What happens with a Mortgage and a CD instead of a Muni


4) What happens if he pays off the higher mortgage.





With this information it isn't hard to make a decision.





And as far as I can tell the corporation doesn't come into play except for the base tax rate. That is making the assumption it is a S-Corp not a C-Corp., but it still makes little difference except how to get the money from the corporation to the owner.





See, it isn't that hard if you break it down into smaller task...you are actually doing several returns to get an answer. Consider yourself lucky...I did this back when there were no computer programs to help...just a ten key and a pencil.





I will tell you that there is nothing in the tax codes that will make this easier. And, with experince it gets a lot easier. Most of it is common sense...earn $1000 tax free in a Muni ($25000 @ 4%) or earn $1500 in a CD ($25000@ 6%) taxed at maybe 28% that is $420...which is better? This is where it might make a difference...the rates between the two and the tax rate..





Another example...the differences between the mortgages. REMEMBER it is ALWAYS a percentage...for every deductible dollar you spend you will only get pennies in return on your taxes. There is a twist here too...to get an accurate answer you would have to calculate two amortization schedules...because the rule of 78's applies to almost all loans (meaning most of the interest is paid first). This makes a difference too. Meaning with the new loan you might be paying more actual interest at 6% than you would on an old loan at 10%. (You won't find that in the tax codes either).





You should also know the rule of 72 (investment). Simply stated divide 72 by the compound interest rate and this will tell you how many years (well very close) it will take your money to double (not taking taxation into account). In 1976 I bought a new truck for $3600 cash...let's say I invested that at 6%, I would now have about $14,400 and would have paid tax on $10,800 (rough estimate actually that would be in 2012). Do you think I could buy a new truck for that amount now?





Are you starting to see the forest even though there are trees in the way?





I said all of this in my first answer...this one is just more detailed. Another thing that I think is beyond the scope of the project...as a professional you should also do a comparsion with expect inflation rates.





Hope this helps clear it up even more.Federal income tax case studying!?
All the answers are hidden here:


http://www.irs.gov/





Have Fun - I've been reading those Pubs for 20+ yrs
Let's see mortgages. Use the mortgage publication 936.


Munis, bonds, Cds, use investment publication 550.

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