Wall Street Journal: Assignment #5
This is an INDIVIDUAL assignment. Submit your answers in hardcopy at the beginning of class. Check the syllabus for the due date. Handwritten answers are NOT acceptable. Use Word to write your answers.
Chapter 7: Taxes
1. Assume you are offered a job with a salary of $40,000 and a bonus of 10% based on your performance during the year.
a. If you receive your full bonus in year 1, what is your total (gross) pay for the year?
b. Assume you are filing under single status. Using the income tax table provided below, answer the following questions.
a) SINGLE person (including head of household)—
If the amount of wages (after subtracting withholding allowances) is: The amount of income tax to withhold is:
Not over $2,250…….. $0
Over— But not over— of excess over—
$2,250 —$11,325 .. $0.00 plus 10% —$2,250
$11,325 —$39,150 .. $907.50 plus 15% —$11,325
$39,150 —$91,600 .. $5,081.25 plus 25% —$39,150
$91,600 —$188,600 .. $18,193.75 plus 28% —$91,600
$188,600 —$407,350 .. $45,353.75 plus 33% —$188,600
$407,350 —$409,000 .. $117,541.25 plus 35% —$407,350
i. What is your marginal tax rate?
ii. What is your average tax rate? First determine the actual tax withheld from your income.
iii. Why do the two tax rates vary? Explain why the US tax code is structured in this manner. Do you agree with this structure? Why or why not?
iv. Calculate your take-home pay using the pay in part 1.a. and the taxes calculated in part 1.b.ii.
v. Which is the relevant tax rate (marginal or average) as you consider whether or not you should work a second job to help you pay off your student loans more quickly? Why?
2. Your employer offers a 401k that you can invest in as an employee of the firm. If you put in 3% of your pre-tax income (listed in question 1.a.), your employer will match 3%.
a. Assuming you put in the full 3% during your first year of employment, how much will your take home pay be reduced? In other words, what is the difference between your take-home pay without the 401k contribution (from part 1.b.iv.) and your take-home pay after a 401k contribution?
b. If you do not earn any return on the investment during that first year, how much will you have saved in total in your 401K account (counting your employer contribution and your contribution)?
c. Assume now that you earn 8.8% per year on your total contribution (from part 2.b.), how much will that one year of savings grow into in 40 years?
d. How much would the account be worth if you contribute 3% per year, and your employer matches 3%, for 40 years (assuming you earn the same salary and 8.8% return)?
3. Now, assume you are instead given a $500,000 investment portfolio when your grandmother dies. Rather than working, you decide to invest the assets using your extensive investment knowledge gained during your time at NAU. You manage your portfolio carefully, earning a return of 8.8% each year (all long-term capital gains).
a. Based on a capital gains rate of 15%, how much money will you have to live on each year (assuming you do not touch the $500,000 in principal)?
b. What is your average tax rate?
c. What is your marginal tax rate?