SFL 260 Exam #2 Practice Problems

Imagine that Heidi is considering going from a part-time to full-time position at work. This move would result in a $20,000 increase to her salary. If Rob and Heidi have a state marginal tax rate of 7% and prefer to pay tithing on their gross income (before taking out taxes), what is Heidi's true increase in salary after accounting for tithing and taxes (and don't forget federal and payroll taxes)? (see example 5.4 or practice problem 6)

$10,270

Peggy (from the previous questions) is enjoying her work so much that she is considering about accepting a full-time position teaching at the community college. If the position would pay her an additional $30,000 annually, how much extra money will the new job really contribute to their annual income after taxes and after tithing. Assume a federal marginal rate of 24%, a state marginal rate of 5%, and that the Worthys pay tithing on their gross income.

$16,005 Expense % = 10% (tithing) + 24% (fed) + 5% (state) + 7.65% (payroll) = 46.65% Take Home % = 100% - 46.65% = 53.35% $30,000 x 53.35% = $16,005

Different scenario. Duncan and Ashley are a young married couple, and Ashley is finishing up her degree at BYU. In 2018, Ashley had $3,000 in qualified education expenses (assume this is calculated correctly). What is the value of Ashley's American Opportunity Credit and how much is refundable? (see the explanation in the table in example 5.1: step 4)

$2,250; $900

Marcus is planning to propose to his girlfriend Melody next week. Since he is a poor college student, Marcus decides that he needs to get a loan so that he can get Melody the ring of her dreams. The engagement ring he chooses costs $3,500 and is financed with a 3 year, 4% (compounded monthly) interest rate. If Marcus takes all 3 years to pay the ring off, how much will he have really ended up spending on Melody's ring?

$3,720.02 Solution: Part 1 PV = <3,500> I = 4/12 N = 3*12 Pmt = 103.33 Part 2 $103.33 * 36 = $3,720.02

Rob and Heidi (married filing joint) expect to pay $20,000 in tithing and $8,000 in state and local taxes each year for the next few years. If they have a 24% marginal tax rate, calculate how much they would save over the next two years if they use "bunching" (assume a standard deduction in 2019 of $24,100). (see example 5.2 or practice problem 3)

$3,864

David is the primary bread-winner for his family of one wife and seven children. Things are tight. He has a gross monthly income of $3,600. His monthly net income is 75% of his gross monthly income. He does not want credit debt payments to exceed 12% of his net income. What can be his maximum monthly payment on credit debt?

$324 $3600 gross monthly income * .75 = $2700 net monthly income * .12 = $324 max monthly payment on credit card debt.

David is the primary breadwinner for his family of one wife and seven children. Things are tight. He has a gross monthly income of $3,600. His monthly net income is 75% of his gross monthly income. He does not want credit debt payments to exceed 12% of his net income. What can be his maximum monthly payment on credit debt?

$324 Solution: $3600 gross monthly income * .75 = $2700 net monthly income * .12 = $324 maximum monthly payment on credit card debt.

J. Fred Muggs dies. He had $500,000 of life insurance. His spouse, Gertrude (age 62), receives the death benefit as a lump sum. She expects to live to be 100 so if she invests it in a mutual fund that has an average annual return of 7.5%, how much money can she withdraw at the beginning of each year for the next 38 years? Ignore taxes and inflation. The account balance will be zero after 38 years

$37,270.68 Begin Mode PV = <500,000> I = 7.5 N = 38 PMTad = $37,270.68

Assume that Rob and Heidi could claim 4 family credits and 3 child credits. How much of their total $8,000 in credits is refundable?

$4,200

Christina needs a late-model used car for her family. What would be the monthly payment on a simple interest auto loan of $19,500 over a four year period assuming an annual interest rate of 4.9%? Assume an annuity due (payment at the beginning of the month).

$446.37 Begin Mode PV = 19500 I = 4.9/12 N= 12*4 PMTad = ? <446.37>

Assume that Alice and Alan had an AGI of $70,000 and that they decide to take the standard deduction. What is their taxable income? (see example 5.1: step 2)

$46,000

Stephen has always dreamed of owning a Ford Mustang! Upon graduating from college, he finally bought a 2016 Ford Mustang for $25,000 using a 5 year auto loan at 4% compounded monthly. If Stephen does not make a down payment on his Mustang, what will his monthly payment be?

$460.41 Part 1 Payment for 60 Month Loan PV = 25,000 I = 4 / 12 N = 12 * 5 = 60 PMT = ? FV = 0

Christina got lost in Antarctica for 5 months and missed several credit card payments. Her credit dropped to 575. Now, what would Christina's the monthly payment be for the same auto loan with an annual interest rate of 8.9%? (Also, annuity due). How much interest would she pay over the four year period?

$480.77 Monthly Payment; 3576.96 Interest paid Begin Mode PV = 19500 I = 8.9/12 N= 12*4 PMTad = ? <480.77> Monthly payment = $480.77 * 48 = 23,076.96 23,076.96 payments - 19500 principal = 3576.96 interest paid

Regardless of your answer in 3, assume that Alice and Alan have taxable income of $50,000. Calculate their tax liability given the tax table above. (see example 5.1: step 3 or practice problem 4)

$5,619.00

Assuming the wage-earner in a family grosses $5000 per month, How much insurance should be purchased on his/her life using the multiple of income method and using a multiple of 15?

$5000 * 12 Months = $60,000 Annual Income * 15 (multiple) = $900,000 Life Insurance

What is the cost per thousand of a 7-year, $12,500 credit life policy that charges a lump-sum premium of $595?

$6.80 Solution: Annual Premium = $595 / 7 = $85 Cost per thousand = $85 / 12.5 = $6.80

Hannah and Josh borrow $40,000 from Hannah's father, Ed, for the down payment on their first house so they can avoid private mortgage insurance. Ed has asked that they pay back the $40,000 in five years and is only asking for 2.5% interest compounded monthly (to protect himself from inflation). If Hannah and Josh decide to pay Ed the same amount at the beginning of each month, how much would their monthly payment be? What is the total amount that Hannah and Josh will pay Ed over the five years?

$708.42 Monthly Payment; $42,505.20 amount paid Begin Mode PV = 40000 I = 2.5/12 N = 60 PMT = <708.42> 708.42 * 60 = $42505.20 total amount paid over five years

Kevin and Peggy Worthy have been married for 15 years, have four children, and always file their taxes together (married filing joint). In 2018, Kevin made $80,000 as a principal for a local high school and Peggy earned $20,000 as a part-time adjunct professor at the local community college. In addition, Kevin contributed $15,000 of his earnings to a Traditional 401k and Peggy put $5,000 towards a Roth IRA. What is the Worthys' adjusted gross income?

$85,000 AGI Gross Income = $80,000 + $20,000 = $100,000 Adjusted Gross Income = $100,000 - $15,000 (Traditional)

Alice and Alan have been married for five years and have two children. In 2018, Alice had wages from her programming job of $65,000 and Alan made $20,000 as a part-time accountant. Alice also got an additional $5,000 year-end bonus paid to her on December 24. In 2018, they contributed $10,000 to Alice's traditional 401k, and $4,000 to Alan's traditional IRA. What is their 2018 gross income? (see example 5.1: step 1 or practice problem 1)

$90,000

Assuming a taxable income of $80,000, what is Alice and Alan's federal marginal tax rate?

22%

You are a little short on your cash. Your rent of $750 is due today, February 15, 2016 but you don't get paid until February 24. Payday Pals will give you a payday loan of $750 today if you will pay back $795 on February 24 when you get your paycheck. What is the APR on this loan?

237.07% PV= 750 N= 9 FV= <795> i= .6495 x 365

Seven years ago, you bought a 1989 Honda Civic. For the past 7 years, you have faithfully paid $425 every 6 months for collision coverage which has a $500 deductible. This morning, your car had a book value of $1,100. On your way home from work, you crash into a tree. The car can still be driven but has $1,400 damage to the car body. If you file a claim, how much money will you receive from your insurance company?

In an accident the insurance will only reimburse you up to the book value minus the deductible. $1100 book value $500 deductible = $600 you will receive from insurance company.

Help Alice and Alan determine if they should itemize or take the standard deduction (and for how much) in 2018. They had the following expenses: $10,000 tithes/offerings, $8,000 state income taxes, $4,000 property taxes, and $3,600 mortgage interest. (see practice problem 2)

Standard deduction $24,000

Regardless of your answer in the previous question, assume the Worthys have a tax liability of $2,000. Their four children have the following ages on 12/31/18: Heidi (18), Heather (16), Dwight (12), and Curtis (10). In addition, Kevin had $12,000 withheld from his paycheck for federal income tax throughout the year. Calculate the Worthys' tax refund.

Tax Liability = $2,000 Family Credit = $500 x 1 (Heidi) nonrefundable Child Credit = $2,000 x 3 (Heather, Dwight, Curtis) = $6,000 ($1,400 x 3 = $4,200 refundable, $1,800 nonrefundable) Total Nonrefundable Credits = $1,800 + $500 = $2,300 Total Refundable Credits = $4,200 + $12,000 = $16,200 Tax Liability = $2,000 - $2,300 = <$300> (stop at 0 because nonrefundable). 0 - $16,200 = <$16,200> tax refund

Whitney finds a $500,000 term life insurance policy that has a monthly premium of $25. What is the annual cost per thousand of this particular policy?

$0.60 Solution: ($25 * 12) / 500 = $0.60

You have just had an emergency nose-ectomy (not a pretty sight). Your health insurance premium is $2,250 per year. Your insurance policy has a $1000 annual deductible after which it pays 90% of all expenses. Your maximum annual co-payment is $2,000. Medical costs incurred: Nose-ectomy-$2500; hospital room-$500/day for 4 days; physician-$1000; medicines-$500. What is your portion of the medical costs (not counting the premium)? After this operation, what is the most you would have to pay for future medical expenses in the current year?

$1,500 Total cost: 2500 (Nose-ectomy) + 2000 (hospital) + 1000 (physician) + 500 (medicine) = $6000 total cost After 1,000 deductible, only $5000 remaining expense Remaining Expense * .10 = 500 (Copayment portion) 500 + 1000 deductible = $1500 (Your total cost) $2,000 (total copay) - 500 (already paid) = 1,500 = max potential pay in remaining year

Jeremy borrows $12,000 to buy a used mini-van for his family (a wife with three children). The annual interest rate of the car loan is 5.75%. It is a 60-month loan. The bank tells him that his monthly payment (at the end of each month) is $________. He wants to pay off the loan quicker, so he decides to make a payment of $300 each month (starting at the end of the first month). How long will it now take Jeremy to pay off the loan (in months)?

$230.30 Monthly Payment; 44.51 Months PV = 12000 I = 5.75/12 N= 60 PMT = ? <230.60> Monthly Payment = 230.60 PV = 12000 I = 5.75/12 N= ? 44.51 PMT =<300.00> Number of Months @$300/mo = 44.51

Andrea and Phillip have been married for two years when they walk into the local State Farm agent's office. They see a banner (with lots of fine print at the bottom) advertising a new life insurance policy for only $0.98 per thousand. Upon reading the fine print, they discover that the value of this policy is $350,000. If they qualified for this special life insurance promotion, what would their annual premium cost?

$343 Solution: Cost per Thousand = Annual Premium / thousands of coverage 0.98 = Annual Premium / 350 Annual Premium = $343

Christina needs a late-model, used car for her family. What would be the monthly payment on a simple interest auto loan of $19,500, over a four year period, assuming an annual interest rate of 4.9%? Assume an annuity due (payment at the beginning of the month or in other words "annuity due").

$446.37 Solution: Begin Mode PV = 19500 I = 4.9/12 N= 12*4 PMTad = ?

Christina has discovered that her credit score is lower than she thought. Her annual interest rate will be 8.9% (compounded monthly). Now, what would Christina's monthly payment be on a simple interest auto loan of $19,500 over a four-year period, assuming an annual interest rate of 8.9% and the payment at the beginning of the month? And how much interest will she pay?

$480.77 monthly payment; 3,576.96 interest paid Solution: Begin Mode PV = 19500 I = 8.9/12 N= 12*4 PMTad = ? Interest = 23,076.896 payments - 19500 principal = 3576.96 interest paid

Rob and Heidi have 6 children with the following ages: Lyndsey (23, unmarried full-time student), Dallin (20, missionary), Jayden (17), Ethan (16), Camden (13), and Izzy (10). What is the total sum of all the child and family credits that Rob and Heidi can claim in 2018? (see practice problem 5)

$7,000

James is in love with Abby. Before proposing, he bought a beautiful $3,600 diamond engagement ring and paid for it with his high-interest Visa card. If the minimum payment is $60 per month and James only pays the minimum each month, how many months will it take to pay off his $3,600 credit card (the company charges 19% APR)? How much interest will James pay on this loan?

190.7 Months; $7842 in Interest PV = 3600 I = 19/12 PMT = <60> N = 190.7 Months 190.7 (n) * 60 (PMT) = 11442 (total payments 11,442 - 3600 (principal) = $7842 (interest)

Following his high school graduation, Brandon applied for and obtained his first credit card! Within the first week, he maxed out the card and now has a balance of $1,500. The credit card company charges an APR of 25% (compounded monthly) and requires only a minimum payment of $40/month. If Brandon only makes the minimum payment, how long will it take to pay off his first month's balance?

3.7 Months Solution: PV = <1,500> I = 25 / 12 Pmt = 40 n = ?

Beatrice and Sylvester borrow $20,000 from Sylvester's father, Brutus, for the down payment on their first house so they can avoid private mortgage insurance. Brutus has asked that they pay back the $20,000 in three years and is only asking for 2% interest compounded monthly (to protect himself from inflation). If Sylvester and Beatrice pay Brutus back in equal monthly installments, how much would their monthly payment be?

572.85 Solution: PV = <20,000> I = 2/12 N = 3*12 Pmt = ?

Regardless of your answer in the previous question, assume the Worthys have an AGI of $70,000. In 2018, the Worthys also paid $12,000 in tithing, donated $500 worth of household goods to Deseret Industries and had medical expenses of $8,000. They also paid state income taxes of $7,000, local income taxes of $2,000, property taxes of $6,000, and mortgage interest of $6,000. Calculate the Worthys' 2018 taxable income.

AGI = $70,000 Itemized Deductions = $12,000 + $500 + $2,750* + $10,000** + $6,000 = $31,250 *Medical Expenses = $8,000 - [70,000 x .075] = $2,750 **State and Local Taxes = $7,000 + $2,000 + $6,000 = $15,000 (but limited to $10,000) Standard Deduction = $24,000 The Worthys will itemize because $31,250 > $24,000 Taxable Income = $70,000 - $31,250 = $38,750

The Worthys are financially savvy and want to take advantage of the principle of bunching. Assume for this problem, that the Worthys expect to pay $18,000 in tithing and $9,000 in state and local taxes for the next few years (these are their only itemized deductions). How much would bunching save them over the course of two years if their marginal tax rate is 24% and the standard deduction in 2019 is $24,100?

Deductions if no bunching: $18,000 + $9,000 = $27,000 $27,000 x 2 years = $54,000 Deductions if bunching: $18,000 + $9,000 + $18,000 = $45,000 (year 1) $9,000 < $24,100 standard (they will take the standard in year 2) $45,000 + $24,100 = $69,100 Tax Savings $69,100 - $54,000 = $15,100 $15,100 x .24 = $3,624

Melissa is diagnosed with breast cancer and requires surgery and chemotherapy to treat it in February. Melissa's insurance policy has a $1,000 deductible, 90/10 coinsurance, and a maximum copayment of $3,000. The total cost of Melissa's treatment is $50,000. What is Melissa responsible for and what will the insurance company cover?

Melissa's Responsibility= $4,000 Step 1. Calculate Melissa's Responsibility Melissa's responsibility = Deductible + Copayment Portion Remaining Bill = $50,000 - 1,000 = $49,000 Copayment Portion = $49,000 x .10 = $4,900 However, max copayment = $3,000. Copayment Portion = $3,000 Melissa's Responsibility = $1,000 + 3,000 = $4,000

Bobby currently has $150,000 in investments and $10,000 in savings. Bobby expects that his funeral costs will amount to $10,000. Bobby has $50,000 left on his mortgage and determines that his wife will need $30,000 per year to survive for 20 years when he is gone. Bobby expects a real rate of 1.5% on his current life insurance policy. Using the needs analysis method, how much additional life insurance does Bobby need?

Step 1. Estimate the total resources needed. PMT = 30,000 n = 20 i = 1.5 PV = $515,059.16 $10,000 funeral + 50,000 mortgage + 515,059.16 lump sum = $575,059.16 Step 2. Determine all financial resources available. $150,000 investments + 10,000 savings = $160,000 Step 3. Subtract available resources from needed resources. $575,059.16 - $160,000 = $415,059.16 Bobby needs an additional $415,059.16 in life insurance.

Regardless of your answer in the previous question, assume the Worthys have taxable income of $45,000. Calculate their tax liability and their marginal tax rate. Round to the nearest dollar if necessary

Total = $5,019 Tax Liability = (45,000 - 19,050) x .12 = $3,114 (19,050 - 0) x .10 = $1,905