Victor and Maria Hernandez Need to Save Money Fast The Hernandez family is experiencing some financial pressures, even though the couple has a combined income of $66,000. Also, their eldest son, Joseph, will start college in only three years. Maria is contemplating going to work full time to add about $15,000 to the family’s annual income.
(a) If Maria begins working full time, how much federal income and Social Security tax will the couple pay on this amount if their marginal tax rate is 25 percent and the Social Security and Medicare tax rate is 7.65 percent?
(b) How much should they save annually for the next three years if they want to build up Joseph’s college fund to $20,000, assuming a 7 percent rate of return and ignoring taxes on the interest?
(c) Given their 25 percent marginal tax rate, what is the Hernandezes’ after-tax return and how would that affect the amount they would need to save each year?
(d) What savings options are open to the Hernandezes that could reduce or eliminate the effects of taxes on their savings program?