Question

Ellen's tax client, Tom, is employed at a large company that offers health care flexible spending accounts to its employees. Tom must decide at the beginning of the year whether he wants to put as much as $2,700 of his salary into the health care flexible spending account. He expects that he will have to pay for at least $8,000 of medical expenses for his family during the year since his wife is seeing a psychiatrist every week and his daughter and son are both having their teeth straightened. Tom does not itemize deductions. Should Ellen recommend that Tom put the maximum in his medical flexible spending account, and if so, why?
Karen is a wealthy retired investment advisor who is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 5 percent or a high-quality corporate bond paying 7 percent. Which investment do you think she will make and why?

Answer 1

Answer: 1. Yes he should

2. Municipal.

Explanation:

1. Tom seems to have a lot of medical expenses coming up and so he should set aside as much as he can to cover them.

Another reason he should is that contributions to this type of account are treated as tax deductible. This means that not only does he get to cover his medical expenses, they can also reduce the taxes that he pays for the year.

2. Municipal Bonds are tax exempt and so Karen stands to gain by investing in Municipal Bonds given her tax bracket.

With her tax bracket, the interest earned on the Corporate bond would be,

After tax interest earned = 7% ( 1 - 0.35)

= 4.55%.

This is less than the 5% she would receive from the high quality Municipal bond so she should invest in the Municipal Bond.