BUSN380 Week 2 Threaded Discussion â€“ Disposable Income & Alternate Savings Vehicles
BUSN380 Week 2 Threaded Discussion â€“ Disposable Income & Alternate Savings Vehicles
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BUSN380 Week 2 Threaded Discussion – Disposable Income & Alternate Savings Vehicles Identify and present all taxes you pay during the course of a typical year. Include taxes that are called fees (such fees are really taxes by another name). Some of the taxes you pay may have to be estimated (i.e., sales taxes). What is the percentage proportion of these taxes in relation to your income; and, with respect to your disposable income (that is, income after taxes), what are the implications insofar as your spending behavior is concerned? My present occupation while in school is a federal workstudy award that pays $3000 per semester. My income for 2010 was a little over $6485 so I did not have to pay federal tax. Any grocery items and food, restaurant meals, and clothing or shoes priced over $110 that I bought in New York City were subject to 8.875% sales tax. Time Warner demands their monthly state and federal taxes, and when I make international calls, use Operator Services or Directory Assistance, my taxes increase based on usage. If those international calls are to mobile devices I incur additional charges, and pay for taxes and fees associated with Digital Home Phone service as well. Con Ed charges sales tax at $4.5%, a Merchant function charge, GRT and other tax surcharges, and a delivery charge for maintaining their electricity delivery system. This is collected on behalf of NYS and/or my locality SBC/RPS and include charges for delivering the electricity, reading and maintaining the meters, a basic service charge, and, charges for billing and payment processing. There is a temporary NY State surcharge that supposed to cover new fees imposed by the state …thank goodness I don’t pay for gas! What information is used to compute taxable income? What parts of computing taxable income mentioned in problem #1 on page 131 of your text relate to your financial situation? In the case of Thomas Franklin, the following tax information was used to arrive at taxable Income: Gross salary, interest earnings, dividend income, 1 personal exemption, itemized deductions, and adjustments to income. To arrive at the amount he would have to report as taxable income, he added gross salary, dividend income, and interest earnings, then subtracted adjustments to income, Itemized deductions and the personal exemption. BUSN380 Week 2 Threaded Discussion – Disposable Income & Alternate Savings Vehicles Of the tax info listed in the problem I had Regular income, and one personal exemption. Understanding the basics of how to arrive at taxable income is a great starting point to understanding our tax system. As mentioned within the lecture, I hope you have had a chance to take a virtual field trip to to the IRS web site. Please share with the class what you found interesting or informative about visiting the sight. It can be overwhelming because there is so much information available. Play around with the search feature and do some research. Once you have done that, share with the class what you searched on the site and a few things you learned that are relevant to your personal tax liabilities. The most interesting part of the IRS website for me dealt with frivolous tax arguments. I’m sure we’ve all heard of tax protestors who claim among other things, that the Government has no legal right to charge income taxes from any citizen. What I didn’t know was that such protests and claims are considered by the IRS to be frivolous arguments, and it is against the law to use them to avoid paying taxes. In the case, Horowitz v. Commissioner, (T.C. Memo. 200691, 91 T.C.M. (CCH) 1120) the court imposed sanctions in the amount of $10,000 when they rejected a taxpayer’s argument that he could find no statute or regulation making him liable for an income tax. Another claim people use that was news to me before I came upon it on IRS.gov, was that citizens are authorized to avoid income tax by filing a zero return. Courts have repeatedly penalized taxpayers for making the frivolous argument that the filing of a zero return can allow a taxpayer to avoid income tax liability or permit a refund of tax withheld by an employer. As far as my situation is concerned, I owe back taxes for early withdrawal of my 401K in 2006. I can pay off the initial taxes owed with help from a relative, but I need a tax penalty and interest abatement. I came across valuable information about making an Offer in Compromise (OIC) to the IRS where I can make a reduced payment offer of a lump sum, once I prove my inability to pay. The IRS will consider my current financial situation as well as my future income potential to determine the appropriateness of my application. Also to recoup the $150 application fee I can claim a poverty exemption, and if they agree the amount will be offset against my new payment amount. BUSN380 Week 2 Threaded Discussion – Disposable Income & Alternate Savings Vehicles Identify the savings (investment) instruments you use or have used in the past (if you haven’t used any, identify those that you are most likely to use). Now, identify a number of alternative savings (investment) instruments that you have not used (or are least likely to use). Compare your two lists. Analyze the tradeoffs that emerge. When I worked as a Chef with Compass Group USA during the early 2000's, I had a 401K that I would periodically borrow against to help with shortterm financial emergencies. At the time I didn’t think of it as a retirement account but as the greatest thing since sliced bread, a lifesaver! When I was laid off I withdrew my $25K with no financial advice or guidance, or even true awareness of the dangers of that. My tax preparer didn't encourage me to include the windfall in my taxable income and though it took three years to appear on the IRS radar, it did. The $2.5K I initially owed in taxes has now blossomed into more than $3.5K with interest and penalties, and paying that debt is now my one major goal. On occasion, I have managed to accumulate some cash that I kept in a regular savings account at my bank but never left it alone long enough to earn any significant interest. Though the interest earned in a savings account is small it can still provide a decent return and is a safe investment. I knew about certificates of deposit, or CDs, but never looked into it. It would have been a likely choice for me however, since it delivers a guaranteed annual rate of interest for the duration of the investment. It is usually locked in for a specific period, so I would only be able to withdraw my money at maturity. The advantage of a CD over a savings account is the higher interest; the tradeoff being the inability to withdraw funds from or add to it until it matures. I am inclined towards buying Treasury securities as they are riskfree investments backed by the U.S. government, and they yield higher interest payments than CDs or savings accounts. Government bonds are good longterm investment vehicles for retirement, but I fear it might be too late at 53 to consider this method. Mutual Funds are just too risky, and my risk tolerance level is subterranean at best! Yes, there are potentially high returns, but there is very high risk of losing all your money in a down market. They consist of debt, (bonds and other fixedincome products) and equity, (stocks and market index linked products instruments). At the risk of going a tad offtopic, just yesterday a colleague approached me about investing in gold coins and gold pieces. The idea was to spend a few thousand, keep the pieces at home, and wait for the resale value to go up so you could resell the pieces to the dealer at a huge profit. Maybe this plan warrants some research, but at face value, it seems to be the scariest one yet. I’m aware that many people believe in buying gold as an investment during periods of uncertainty, but people like him who respond to TV ads that sell gold are likely to pay way too much for it. BUSN380 Week 2 Threaded Discussion – Disposable Income & Alternate Savings Vehicles The sellers who push “nonconfiscatable” gold coins are playing on people’s fears and ignorance, convincing them to buy at markups of as much as one hundred percent, even though the normal markup on gold bullion coins like American Gold Eagles, Krugerrands or gold bullion bars, is two percent to seven percent, depending on the coins and the quantities. I fear that my colleague might be the victim of a fasttalking telemarketer skilled at hyping up frightening topics that dominate the news, like the declining dollar, the escalating national debt and massive deficit spending. In this climate it is easy to get potential buyers to react emotionally, instead of logically, buying gold not as an investment, but as protection against calamity. Try this problem: If a company charges you 4% for a two week period to give you your refund up front, what would your annualized (effective annual) interest rate be? What are your thoughts on the deal? What kind of return on your investment of that refund or money would you need to justify such a loan? APR= (interest rate/amount borrowed)*(days in a year/days in the term contract) * 100 APR = (4%/100)*(365/14)*100 APR = (.04)*(26.07)*100 APR = 104.28% When you study the markets, and analyze the pricing of different investment products you discover that pricing often reflects risk. Let's discuss risk and how it relates to reward. What is the relationship between the two? A fundamental idea in finance is the relationship between risk and return. The greater the potential return you seek, the greater the risk you generally assumes. A free market reflects this principle in the pricing of an instrument: strong demand for a safer instrument drives its price higher (and its return proportionately lower), while weak demand for a riskier instrument drives its price lower (and its potential return thereby higher). BUSN380 Week 2 Threaded Discussion – Disposable Income & Alternate Savings Vehicles For example, a US Treasury bond is considered to be one of the safest investments and, when compared to a corporate bond, provides a lower rate of return. The reason for this is that a corporation is much more likely to go bankrupt than the U.S. government. Because the risk of investing in a corporate bond is higher, investors are offered a higher rate of return. As far as investment products are concerned, stocks go up and down more dramatically than bonds or cash, and bonds more so than cash. When these investments go down you lose money, when they go up you gain money. That is what is meant when investors talk about risk. Risk is the chance that you will lose or gain money on an investment. Since stocks go up and down more than bonds or cash, stocks are a riskier investment. What is important to understand is that over the longterm riskier investments generally earn more than less risky investments, stocks more than bonds, bonds more than cash. Therefore there is a relationship between risk and reward. http://en.wikipedia.org/wiki/Risk http://www.icmarc.org/xp/rc/planning/guides/buildportfolio/riskreward.html http://stocks.about.com/od/riskreward/a/Understandrisk.htm
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