1. Project Dan’s and Christina's annual cash flow and savings from 2020 until Dan's retirement at age 65. You may make reasonable assumptions about long-term yields and appreciation rates toward this end. CLD stock’s expected future dividend yield should be about 1%. The MacHarrys expect the stock to appreciate over the long-run at a 7% rate. You should assume the current tax law stays in effect during the projection horizon.
Assignment need to be done in a excel file. I attached a copy of the template but need to be adjusted based on the family financial data.
ACCT6420, Fall 1997 Page 1 of 3 Online ACCT 6400, Summer A 2020 Module 6—Personal Financial Planning Case Professor Toby Stock Dan and Christina MacHarry, ages 50 and 43 respectively, are married and have two children (Vinnie, 10 and Ellie, 15). They are both employees and shareholders at County Line Dairy Corporation (CLD). CLD is a regional, privately-held firm with locations in 7 midwestern states. The company was a fast-growing firm, but recently has suffered setbacks recently as the prices of dairy products have stagnated while the associated costs have increased gradually. Dan is an operations manager and is responsible for running the non-milk product line. Christina is a line supervisor for the CLD milk product line. Below is a summary of Dan’s and Christina’s 2019 tax return and their 2020 estimates: The MacHarrys have claimed the child tax credit and childcare credit in all prior years for both children. They do not expect their 2020 income to differ significantly from 2019, although they expect their salary income to be about 5% higher in 2020 and they sold some stock in early 2020. The large decrease in charitable contributions is attributable to a 2019 lump sum $6,000 gift to their church. In addition, Christina received an inheritance in February 2020 from her uncle, Charlie Alan Hartline. The inheritance included $25,000 worth of furniture and other personal items and a $220,000 traditional individual retirement account (IRA) that Charlie had accumulated during his working years. The MacHarrys did not increase their tax withholding for the inheritance because they know that federal taxable income generally excludes inherited assets. The MacHarrys live in a state that taxes their gross income before any federal interest at a flat 4%. Below is some expenditure data for the MacHarrys. These exclude income tax payments because the MacHarrys do not know how to compute tax numbers. Christina is considering retiring from County Line on December 31, 2020 to become a full-time homemaker. Christina’s estimated 2020 salary is $75,000. Christina believes that staying home full-time will eliminate their day care expense, cut their restaurant expenditures by 40%, and decrease their clothing expenditures by 25%. In addition, Christina will still qualify for full social security benefits when she retires, regardless of whether or not she continues to work. Dan and Christina are worried about funding their retirement and their children’s college education if Christina retires. The $38,000 home improvement is for updating their master bathroom. They sold $28,000 of CLS stock in early 2020 to fund most of this cost; the adjusted basis of that stock was $50,000. CLS is a corporation that is loosely-affiliated with CLD. The MacHarrys acquired their CLS shares when they and other shareholders created that corporation 3 years ago; they own no remaining shares of this stock. The MacHarrys have also provided the following net worth information. After the CLS sale, the only stock the MacHarrys own are shares of CLD. Note that the basis amount for the stock is from 2019 and so it includes the basis of the CLS shares they no longer own. Dan and Christina have a number of non-tax concerns that might impact your recommendations. · What we know of the MacHarrys suggests that they are unlikely to embrace any severe cutbacks in their lifestyle or standard of living. They are much more likely to reconsider Christina’s decision to stay at home after Ellie starts attending college than they are in drastic spending cuts. CLD is likely to hire her again if or when she wants to work again. · One of Dan’s and Christina's major concerns is saving adequately for their children’s college education. To date they have not specifically earmarked savings for this purpose. However, they are now very interested in ways to more efficiently save for this future expense. Their desire is to send their children to private universities in the east (e.g., Harvard, etc.), so they are anxious to begin saving toward this goal. · Dan believes that their investment portfolio is diversified insufficiently. He is adamant about reducing their exposure to diversifiable investment risk. · Dan and Christina are moderately risk-averse regarding their investment portfolio. They are willing to incur reasonable levels of nondiversifiable (i.e., market) investment risk on their retirement investments since the time horizon until both are retired is about 20 years from now. Required—write a letter to the clients that addresses the following issues/questions: 1. Estimate Dan’s and Christina’s taxable income and income tax liability for 2020. Toward this end, and to help you with the other required elements of your client letter, each team member must research one of the following issues for inclusion in your final report. You will need to perform this research before addressing the other parts of the case—one reason is so that you can obtain any additional information you need to resolve your research issues. Write your memos in a FILAC format with complete and properly-formatted references to primary authority. a. The MacHarrys acquired almost all of their CLD stock when the founders first incorporated toward the end of 2009. They also acquired the CLS stock 3 years ago upon its formation. Dan’s friend Ken said he thought that these stocks qualified for “special tax breaks” when sold. Research this issue for each stock. Your answer should include a computation of the estimated after-tax cash flow from selling the CLS stock and from selling the CLD stock when Dan retires. b. Are the MacHarrys correct in excluding their inheritance from taxable income? If they are incorrect, how and when must they report the income? c. One option that Dan is considering reducing their investment risk exposure by purchasing an annuity from a life insurance company. The annuity would cost $200,000 immediately and will pay the MacHarrys $60,000 per year for 20 years when Dan turns 65 years old. Dan wants to know how the government will tax these annuity payments. d. Are there any special savings vehicles that would help the MacHarrys save for their children’s education? If so, summarize each of them and recommend a course of action. (You should also consider the American Opportunity Tax Credit in the tax projections described below. You can assume that Vinnie and Ellie will graduate from college in 4 years.) Prepare your research results in formal FILAC-formatted research memos for the files, but include a discussion of your results in the client letter, too. If your team has only 3 members, delete research item d above. Please identify which team member researched each of the issues above in the memo headers. 2. Project Dan’s and Christina's annual cash flow and savings from 2020 until Dan's retirement at age 65. You may make reasonable assumptions about long-term yields and appreciation rates toward this end. CLD stock’s expected future dividend yield should be about 1%. The MacHarrys expect the stock to appreciate over the long-run at a 7% rate. You should assume the current tax law stays in effect during the projection horizon. Continued on the next page…. 3. How will Christina’s imminent retirement affect your calculations and conclusions in 2. above? Estimate the present value, after-tax cost of Christina retiring at the end of 2020. 4. Assess whether the MacHarrys' consumption goals are compatible with their expected income level. Are they saving enough money to meet their goals? Will they have enough income/wealth to retire? If not, suggest how they might modify their spending patterns, (keeping in mind that they do not want to spend less…). It will be useful for the MacHarrys if you compare your results first assuming that Christina will not return to work and then assuming that she will return to work. 5. Make any investment-related recommendations you feel the facts warrant. Provide support for your recommendations, as well as quantification of the wealth effects of your recommendations, or at least a discussion of them if the values are unknowable. You can assume no capital gain or loss transactions other than those discussed or proposed above. PLEASE ASSEMBLE YOUR TEAM’S RESULTS INTO ONE COMBINED WORD DOCUMENT. REMEMBER TO RESERVE SUFFICIENT TIME FOR THIS PROCESS, AS WELL AS FOR ALL TEAM MEMBERS TO READ AND EDIT ALL PARTS OF THE COMBINED DOCUMENT BEFORE YOU SUBMIT IT TO BLACKBOARD. Rev date: 11 June 20200601 MacHarry PFP Case rev 2 Sheet1 EXPENDITURE INFORMATIONEST'D 2020APPROX. 2019 UTILITIES$ 3,600$ 3,600 INTERNET AND CABLE TV$ 2,625$ 2,500 FOOD$ 6,500$ 6,000 CLOTHES$ 10,000$ 12,000 HOME IMPROVEMENTS$ 38,000$ - HOME FURNISHINGS$ 3,000$ 2,000 AUTO INSURANCE$ 3,000$ 3,000 AUTO EXPENSES$ 6,000$ 6,000 HEALTH & LIFE INSURANCE$ 6,000$ 5,500 HOMEOWNERS/LIAB. INSURANCE$ 2,000$ 2,000 CHILD CARE$ 6,000$ 7,000 HOUSEHOLD REPAIRS,ETC$ -$ 4,000 RESTAURANTS$ 8,000$ 8,000 ENTERTAINMENT$ 6,000$ 6,000 VACATION & TRAVEL$ 17,000$ 15,000 XMAS, GIFTS, ETC.$ 8,000$ 6,000 TECHNOLOGY PURCHASES$ 2,000$ 1,000 MISC$ 5,000$ 5,000 $ 132,725$ 94,600 NET WORTH INFORMATION: Est'd 12/31/2020 12/31/2019 12-31-20 BASIS CASH & CDs 55,000 $ 18,000 $ 55,000 $ COUNTY LINE (& CLS) STOCK 480,000 $ 550,000 $ 150,000 $ T-BONDS 10,000 $ 10,000 $ 45,000 $ RETIREMENT ASSETS 300,000 $ 40,000 $ - $ HOME 470,000 $ 430,000 $ 400,000 $