Assignment Detail

Assignment ID: FG132920999

Salma’s grandmother died in November 2020 and left her an investment portfolio worth $200,000. In January 2021, when Salma received ownership of the investments, the portfolio consisted of $120,000 in tax-exempt securities and $80,000 in taxable securities. Her grandmother’s accountant estimated that the tax-exempt securities would earn $8,150 in interest and the taxable securities would pay $7,280 in dividends in 2021. The investment interest expense related to the portfolio is estimated at $2,400. Salma is single, has no other investments, and earns $60,000 as an engineer. She expects that her itemized deductions, not including the investment interest expense, will include state income taxes of $4,500, real estate taxes of $6,600, and home mortgage interest of $7,000.

Problem 1: What is Salma’s projected taxable income for 2021?

Problem 2:  Assume that in June 2021 Salma switches $40,000 from tax-exempt securities to taxable securities and the projected rate of return on both portfolios remains the same. In switching the securities, Salma has a $10,000 gain on the sale of the tax-exempt securities and pays $1,500 in tax. Instead of reducing the value of her portfolio, she pays the tax from her other income. All the other information would remain unchanged, except that state income taxes would increase by $500. What is the effect on her taxable income of changing her investment strategy?

Problem 3:  Should Salma switch $40,000 in her portfolio from tax-exempt securities to taxable securities? Explain.