Christopher Deming

Continuing
Case: Cory
and Tisha
Dumont
Part 1
Summary:

Cory and Tisha Dumont have become concerned about their personal finances after

reading a Money article recently. After reading they have sought help to help arrange their

finances. Cory and Tisha are 31 and 30 years old respectively. They were married six years ago,

and have a son named Chad, age 4, a daughter Haley, age 2, and a fat tabby cat named Ms. Cat.

Cory is a store manager making $45,000 a year, and Tisha is an accountant earning $53,000 a

year. The Dumonts currently are renting a three-bedroom townhome for $2,000 per month, but

are hoping to purchase a home within the next three to five years. For their wedding, they

applied all gifts and family contributions to a market index mutual fund which, last checked, has

a balance of $13,000. Neither Corey nor Tisha know whether the amount of taxes they are

paying are correct. They have home, automobile, and life insurance, but have always chosen the

lowest premiums without regarding how much coverage comes with. Tishas life insurance

policy is $1,800, and she pays a premium of $720 annually. They are unsure whether they

should swap their credit cards with new ones that come with low interest rates and other bonuses.

They make $100 payments for their credit cards every month, and their credit card balance is

typically around $1,300. They typically use credit cards to cover daily expenses, but tend to

have about $100 of cash on hand. They have a savings account with a balance of $2,500 that

earns 3% interest annually, and a checking account with a balance of $1,800 that earns interest of

0.75%. The checking account balance requires a minimum of $1,000. Cory and Tisha are

concerned about paying for college for their children, because they both are still paying off

student loans. Both Dumonts participate in a qualified retirement plan at work, but do not fully

understand what that means. The only retirement account they own is Corys 401k account that

was left with his former employer. When he left the company, the account had a balance of
$2,500. Cory is not a fan of financial surprises, but Tisha is willing to take calculated risks. The

Dumonts not done any estate planning. They both enjoy outdoor activities with the family, and

enjoy playing golf. The Dumonts are considering joining a country club that costs $250 a month.

Chad will need braces and glasses within the next few years.

Additional Information:

Other Estimated Annual Expenditures:

Food (at home and dining out) $6,900

Clothing $3,300

Auto Insurance $2,200

Transportation (use, maintenance, licensing) $2,400

Dental and Health care $850

Life insurance for Tisha $720

Medical Insurance (pretax employer deduction family plan, Tisha) $3,200

401(k) retirement (pretax employer deduction, Cory) $2,250

401(k) retirement (pretax employer deduction, Tisha) $2,650

Renters Insurance $600

Utilities (electricity, water/sewer, cable/ internet) $3,900

Entertainment $2,400

Telecommunications (cell phones) $1,800

Taxes (federal, state, Medicare, Social Security, deduction) $22,000

Property Taxes (auto) $695

Charity Donations $2,400

Day Care $10,000

Savings $1,200

Miscellaneous $2,400

Other Assets:

Automobile No. 1
o 2 year-old, midsize SUV with a fair market value (FMV) of $14,800.
o Amount Owed: $12,925 (36 months remaining on the loan)
o Monthly Payment: $405
Automobile No. 2
o 4 year-old, 2 door coupe with an FMV of $7,800
o Amount Owed: $0
Household Furniture, electronics, and other personal property worth amount $12,000
Antique Jewelry
o Tisha received this as an inheritance from her grandmother and said that she

would never part with it. The jewelry has an estimated value of $19,700
When Tisha turned 21, her father gave her 100 shares of the Great Basin balanced Mutual

Fund worth $1,000. Today the fund is worth $2,300

Other Consumer Debt:

Credit card debt (Visa, MasterCard, Discover, American Express and several store cards)
o $1,300 revolving outstanding balance
o $50 minimum monthly payments (approximate)
o $100 actual monthly payments
Student loan debt (for Cory)
o $8,200 balance
o $196 monthly payment (48 months remaining on the loan)
 o $652 interest payment for 2007
Furniture company loan
o $5,300 balance
o $210 monthly payment (30 months remaining on the loan)

1. Identify the stages of the life cycle that best describes Cory and Tisha today. What

important financial planning issues characterize this stage?

Cory and Tisha are still in stage one of the financial life style, which is typically between

the ages of 18 and 55 years old. Cory and Tisha, who are the ages of 31 and 30 respectively, fall

in between the ages of 18 and 55, were married six years ago, and have two children, Chad age 4

and Haley age 2. There are a number of financial planning issues that Cory and Tisha need to

address while in this stage. One issue that they are currently working on is the purchase of a

house. Within the next three to five years, the Dumonts plan on purchasing a home, using their

market index mutual fund as a down payment. Currently, that fund holds $13,000. Additionally,

the Dumonts need to understand that retirement planning begins in this stage. They have already

begun some retirement planning with Corys 401k account, which holds $2,500, but consistent

reevaluation of their retirement plan is important. The Dumonts have already begun forming a

family, which is good, because they can now prepare to plan for their familys future. They have

begun researching college education expenses for both Chad and Haley, which is a positive sign.

Cory and Tisha are still on the hook for $8,200 of student loans, and they need to continue to pay

them off. Because Cory and Tisha are now married with children, it is incredibly important to do

a couple of things to ensure their familys protection. First, Cory and Tisha need to form a will

so that, in case of a tragic accident, the Dumont estate will be handled in the way that Cory and

Tisha wish. Also, Cory and Tisha need life insurance, which Tisha has acquired. Currently, their
life insurance account holds $1,800, and the family should look into increasing the account.

Finally, in this stage in life, it is essential for Cory and Tisha to begin making as much money as

possible while building up savings. This will allow them to prepare, plan, and execute what they

wish to accomplish for the future.

2. Based on the issues identified in Question 1, and your knowledge of the Dumont

household, help Cory and Tisha complete Worksheet 1 to identify their short-term,

intermediate, and long-term goals.

Short-Term Goals (less than 1 year)

DESIRED

PRIORITY ACHIEVEMENT ANTICIPATED

GOAL LEVEL DATE COST

Accumulate emergency

funds equal to PRIMARY 12 months $ 18,874.25

3 months' living expenses

Pay off outstanding bills PRIMARY Immediately
Pay off outstanding credit
PRIMARY Immediately 1300
cards
Purchase adequate property,

health,
PRIMARY 3 months
disability, and liability

insurance
Purchase a major item SECONDARY
Finance a vacation or some After 6 months'

other SECONDARY living expense is 250/month

entertainment item covered

Other short-term goals
(specify)
Estate planning PRIMARY Immediately
Increase savings PRIMARY Immediately

Intermediate-Term Goals (1 to 10 years)

Save funds for college for
Primary 10 years $ 100,000.00
an older child
Save for a major home
Secondary
improvement
Save for a down payment on 20% of house
Primary 3-7 years
a house value
Pay off outstanding major
Primary 3-5 years $ 26,425.00
debt
Finance very large items
Secondary
(weddings)
Purchase a vacation home or

Secondary

time-share unit
Finance a major vacation
Secondary
(overseas)
Other intermediate-term

goals (specify)
Continue saving for
Secondary
retirement
Increase months' living
Primary 2-3 years $ 37,748.50
expenses to 6

Long-Term Goals (greater than 10 years)

Save funds for college for a
Primary 14-16 years $ 110,000.00
young child
Purchase a second home for
Secondary
retirement
Create a retirement fund

large enough

to supplement your
Primary 19 $18,00/year
pension so that

you can live at your

current standard
Take care of your parents
Secondary
after they retire
Start your own business Secondary
Other long-term goals

(specify)
Downsize Secondary
Final Expenses Secondary

3. Complete Worksheet 5 for the Dumonts.

Worksheet 5 - Simplified Income Statement Worksheet

Your Take-Home Pay

A A $

. Total Income . 89,900.00

$

B. Total Income Taxes - B. 22,000.00

C. After-Tax Income Available for Living

Expenditures $

or Take-Home Pay (line A minus line B) = C. 67,900.00

Your Living Expenses

D D $

. Total Housing Expenditures + . 24,000.00

 $

E. Total Food Expenditures + E. 6,900.00

F. Total Clothing and $

Personal Care Expenditures + F. 3,300.00

G G $

. Total Transportation Expenditures + . 7,955.00

H H $

. Total Recreation Expenditures + . 2,400.00

I. Total Medical Expenditures + I. $ 850.00
$

J. Total Insurance Expenditures + J. 3,520.00

K K $

. Total Other Expenditures + . 26,572.00

L. Total Living Expenditures $

(add lines D through K) = L. 75,497.00

M Income Available for Savings and Investment M $

. (line C minus line L) = . (7,597.00)

4. Develop a balance sheet for the Dumonts using Worksheet 4. Do they have a positive or

negative net worth?

After completing the balance sheet for the Dumonts, it has been determined that they have a

positive net worth. The Dumonts have a total asset accumulation of $78,300, while their total

liabilities reach a total of $28,050. This results in the Dumonts having a net worth of $50,250.

5. Using the information from the income and expense statements and the balance sheet,

calculate the following

a. Current ratio
 The Dumonts have a current ratio of 2.71, which is better than the suggested

minimum of 2.0.

b. Months living expense cover ratio

The Dumonts have a months living expense cover ratio of 0.6, which is far below the

suggested minimum of 6.0.

c. Debt ratio

The Dumonts debt ratio is 35.82%, but when factoring out the priceless antique

jewelry, is closer to 47.87%.

d. Long-term debt coverage ratio

The long-term debt coverage ratio for the Dumonts is 3.73, which is above the

suggested minimum of 2.5.

e. Savings ratio

The Dumonts have a savings ratio of -11.19% which is far below the suggested

minimum of 10%.

6. Use the information provided by the ratio analysis to assess the Dumonts financial

health. What recommendations would you make to improve their financial health?

After examining the Dumonts income statement, balance sheet, and expense reports, a

number of useful financial ratios can be determined. To start, the current ratio will identify how

liquid the Dumonts assets are, and typically a current ratio over 2 is a good sign. The Dumonts

have a current ratio of 2.71, which puts them in a good position going forward. The second ratio

that should be examined is the months living expense cover ratio, which determines how many
months of expenses can be covered using the monetary assets the Dumonts have saved. At the

minimum, one should hope to cover six months, but unfortunately, the Dumonts are barely

covering half a month. This is a dangerous sign, because if something were to happen in which

their income would cease, their savings would not carry them for a long period of time. Cory

and Trisha need to find a way to either cut some expenses, begin focusing more on contributing

more of their income into their savings, or preferably both. The debt ratio will help determine

the level of debt one has based off of the amount of assets they own. When looking at the

Dumonts debt ratio, they have a ratio of 35.82%, which could a promising sign. Compared to

the amount of assets they have, the Dumonts debts are relatively low. However, what needs to

be accounted for is that the Dumonts most expensive asset is a set of jewelry that Tisha received,

and would never part with. This needs to be factored out, since it will almost certainly never be

sold or put up as collateral. Therefore, a more accurate debt ratio for the Dumonts is 47.87%,

which is beginning to look high, especially since they do not have any highly expensive tangible

assets and wish to become more indebted with the purchase of a house. The long-term debt ratio

shows how far ones income before expenses can cover their long-term debt obligations. At the

minimum, a solid goal is to have a 2.5 long-term debt ratio. The Dumonts have a ratio of 3.73,

which is a good sign for the family. The most troublesome red flag the Dumonts have is their

savings ratio. The savings ratio determines how much of ones after-tax income will be able to

go towards savings after expenses. Typically, you would want a savings ratio over 10%, but the

Dumonts have a savings ratio of -11.19%. This shows that their expenses are not being covered

by their after-tax income, and the family is having to eat into their savings in order to cover

expense costs. This is far from ideal, because they will not be able to sustain this level of

spending. The Dumonts need to cut expense in order to bring up this ratio, starting with their
recreational expenses. Cory and Tisha are spending $2,400 a year on entertainment, which is

having a large negative impact on their ability to save. Unfortunately, golfing may need to be cut

out because they need to drastically decrease this as a start. Their biggest expense at the

moment, is daycare. Currently, they are spending $10,000 a year for daycare, and if this expense

could be cut out entirely, they will be able to begin saving. With Chad being 4, he is about to

begin kindergarten which will decrease the expense, but the Cory and Tisha should look to move

both Chad and Haley out of daycare immediately, because it is constricting their ability to save

for the future. They should look into the possibility of seeking out a family member to supervise

the children while Cory and Tisha continue to work. Eliminating these two expenses will allow

them to change their savings ratio from a -11.19% to a 7.07%. Though 7.07% is still not ideal, it

is much better figure than what they are at now, and a good starting point to build off of.

Additionally, if the Dumonts are able to slash these expenses and increase their savings, their

months living coverage ratio will rise as well.

7. Do the Dumonts have an emergency fund? Should they? How much would you

recommend they have in their emergency fund?

The Dumonts would have a hard time claiming that they have an emergency fund at the

moment. They only have $2,500 in their savings account, which, as previously discussed, would

not go far towards their yearly expenses. They could liquidate their mutual fund accounts (total

of $15,300), which would have a substantial impact in case of an emergency, however, a large

portion of those accounts comes from the market index fund. They are planning on using this

fund within the next three to five years as a down payment towards a home. This drastically

limits their abilities due to the fact that they will either be relieved of that money within the next
few years, or an emergency will drastically hinder their goals of owning a home. Cory and Tisha

do need to create an emergency fund in order to prepare for the unpleasant surprises life can

bring. With a solid emergency fund, Cory and Tisha will be able to adapt more efficiently if an

emergency arises. To start, they need to increase their monetary assets by enough to cover six

months of their expenses. This would require saving about $33,334. Luckily, they both have

health and auto insurance coverage, but they have minimum plans. They should look into opting

for a little more expensive plan that will allow them more coverage. Similarly, they have a low

level life insurance plan. This has resulted in high premiums with low coverage. Trisha should

investigate more beneficial plans, since her current one does not seem to be worth the level of

coverage it is providing.

8. According to the Money article that Cory and Tisha read, they can expect to pay

$100,000 in tuition and other college related expenses when Chad enters college, and

even more for Haley. The Dumonts are hoping that Chad will receive academic

scholarships that will reduce their total college costs to $40,000. Assuming the Dumonts

start a college saving program today and manage to earn 9 percent a year, ignoring taxes,

until Chad is 18, how much will they need to save at the end of each year? How much

will the Dumonts need to save if Chad does not receive scholarships?

In order to pay for Chads tuition, whether he receives scholarships or not must be accounted

for. Chad is about 14 years away from college, which gives the Dumonts plenty of time to begin

saving for him. It is being assumed that Cory and Tisha will earn 9% on their sons college

investment. Therefore, in order to reach $40,000 in 14 at a rate of 9%, the Dumonts need to

begin saving $1,57.33 a year at the end of this year. In case Chad does not receive his

scholarships, the Dumonts need to save $3,843.32 a year for 14 years to reach $100,000.
 9. How much will the Dumonts need to save at the beginning of each year to accumulate

$40,000 for Haley to attend college, if they receive 9% on their savings? Assuming the

Dumonts need an accumulation of $110,000 to fund all of Haleys college expenses, how

much do they need to save at the beginning of each year? If, instead, they save money at

the end of each year, how much will they need to put away to reach the $110,000 goal if

they can earn 9% compounded annually starting today?

If the Dumonts are trying to start saving now for Haleys college education, and are

predicting that Haley will be able to receive academic scholarships, they will have to begin

saving $1,111.92. This is if their future value is $40,000, the time it will take in order to reach

the goal is 16 years (assuming Haley begins college at 18), they continue gaining 9% returns on

their investment, and they begin making payments into the account at the beginning of each year.

If Haley does not receive the scholarships, and the Dumonts have to pay the full predicted

$110,000, they need to begin making payments of $3,057.79. This is if the future value is

$110,000, the time to save is 16 years, they continue receiving a return of 9%, and they make

payments at the beginning of the year. Finally, if the Dumonts need to reach $110,000 in 16

years, using a rate of return of 9% compounded annually, they will need to make payments of

$3,332.99 a year.

10. How much will Tishas Great Basin Balance Mutual Fund shares (currently valued at

$2,300) when Chad enters college, assuming the fund returns 7% after taxes on an

annualized basis? How much will the shares be worth when Haley turns 18 years old?

What will be the value of the shares when Tisha retires at 67 years old, assuming, a 9%
 after taxes return and no deductions from the account? What has been the annualized rate

of return since Tisha received it as a gift?

Tishas current Great Basin Balance Mutual Fund has a current account balance of $2,300. If

the account is able to continue making a rate of return of 7%, once Chad reaches college after 14

years, the mutual fund account will amass a total of $5,930.63. This is by using the future value

formula, using $2,300 as the present value, 14 years as the time, and the rate being 7%. If Tisha

holds onto the shares until Haley turns 18, the shares will be worth a total of $6,789.98. This can

be found using the future value function, and using $2,300 as the present value, the time being 16

years, and the rate continuing to be 7%. If, however, Tisha holds onto the shares until she retires

at the age of 67, and the shares are able to generate 9% returns annually, the shares will increase

in value to a price of $55,783.82. This is if it is assumed that the present value is $2,300, the

time is 37 years, and the rate of return is 9%. Finally, Tisha has been able to receive and

annualized rate of return of 9.7% on the Great Basin Balance Mutual Fund since it was given to

her at the age of 21. This was found by determining that the rate of return on the investment was

130%. Therefore, to find the annualized rate of return, one needs to add one to the 130%, then

raise the sum to one divided by the number of years (9), and finally subtract one. This resulted in

9.7%.

11. Recall that the Dumonts set up a savings fund for future down payments with gifts and

contributions from their wedding. How much will the market index fund valued at

$13,000 be worth in 3, 5, and 7 years if they can earn a current rate of return of 6%?

How much will the fund be worth in 3, 5, and 7 years if they can obtain an 8% rate of

return?
 The Dumonts received cash gifts for their wedding, and they chose to invest their gifts into a

market index mutual fund. Currently the shares of the fund that the Dumonts own are worth

$13,000. The intent with these shares is to sell them within three to five years in order to make a

down payment towards a home. If the Dumonts wish to begin purchasing their home using these

shares in three years, and the fund obtains a return of 6%, these shares will be worth $15,483.21.

If the shares have the same return, but the Cory and Tisha wish to wait for five years, the shares

will be worth $17,369.93. Finally, if the shares still earn 6% and they wait seven years before

cashing out the shares for their home down payment, the shares will be worth $19,547.19. If the

fund is able to earn 8%, however, and the Dumonts wait three years to make their down

payment, the shares will be worth $16,376.26. If they are able to generate 8% returns on the

fund and wait five years, the shares will be worth $19,101.26 after that five years. Finally, the

shares will be worth $22,279.72 if Cory and Tisha wish to wait seven years before cashing out

and the fund generates a return of 8%.

12. Assuming an 8% return for the current year for the market index fund valued at $13,000

and a 15% federal marginal tax rate, how much will the Dumonts pay on their

investment, either from their savings or their current income this year? By how much,

after taxes, will their current account grow this year?

Assuming that the market index fund the Dumonts own returns 8% for the current year, it

can be determined that the fund gained $1,040. This is taxable income under the federal tax

laws. Currently the federal marginal tax rate is 15%. This means that the Dumonts are required

to pay 15% of the $1,040 gained by the market index fund towards the government. This results
in a tax liability of $156 (1040*.15). After factoring out the federal tax liability of the market

index fund, the Dumonts will grow by $884, resulting in the account totaling $13,884 after taxes.

13. Assuming that Cory does nothing with his 401k retirement account from his former

employer and the government grows at a rate of 5% annually, how much will Cory have

when he retires at age 67? If instead, Cory takes control of the money and invests it in a

tax-deferred IRA earning 10% annually, how much will he have at age 67?

If Cory wishes to leave his 401k account, which amounts to $2,500, with his previous company,

and allow it to grow at a rate of 5% annually, his account will come to a total of $14,479.54 after

36 years, which is how long it will take for him to reach the age of 67. However, if Cory decides

to take control of his account, and invest it into a tax-deferred IRA with an earnings rate of 10%

annually, he will be able to save a much greater sum. After 36 years at 10% in the tax-deferred

IRA, Cory will have a total of $77,281.70 for retirement. This is a significantly greater amount

of money, and it is highly suggested that Cory takes control of his 401k account, and switches it

into the IRA account.

14. Using the income and expense estimates provided by Tisha, calculate the Dumonts

taxable income using the 2014 tax information provided in the text.
a. Do the Dumonts have enough tax-deductible expenses to itemize reductions?

The Dumonts should not consider itemized reductions when preforming their taxes. This

is due to the fact that they could only reduce their taxes based on their medical and dental

payments and their charitable donations. The medical and dental bill reaches a total of $850,

which amounts to 1% of the total AGI. This allows them to deduct them, however, when added

to the charitable contributions of $2,400, they could only itemize a total of $3,250. This is
substantially lower than the standard reduction of $12,400. Therefore, the standard reduction

would be the logical choice.

b. Explain the tax ramifications of Corys student loans interest, estimated to be

$652 for 2014.

Since Cory is still paying off interest on his student loans, the interest amount is allowed

to be deducted from the gross income. This means that before the federal tax liability is

calculated, the gross income of $98,000 can be reduced by the $652 of interest owed. This,

along with the 401k contributions, will reduce the gross income to the adjusted gross income of

$92,448, in which the Dumonts will use for tax purposes.

c. How much Social Security and Medicare taxes are withheld from Corys and

Tishas income?

In order to determine the taxes withheld from Corys and Tishas income, the Social Security and

Medicare tax rates must be known. As of 2014, the tax rate for Social Security is 6.2%, and

Medicare is 1.45%. Therefore, after multiplying the gross income by these rates, the taxes

withheld for Social Security is $6,076.00 and $1,421.00 for Medicare.

d. What is the Dumonts total federal income tax liability?

The Dumonts tentative federal income tax liability comes to a total of $8,729.70. This can be

found by determining their adjusted gross income by taking out the 401k contributions and

interest paid on student loans. This results in an AGI of $92,448. If the Dumonts opt for the

standardized reductions, they can also subtract $12,400 from the AGI. The Dumonts can also

take advantage of personal tax exemptions, which is $3,950 per person, equaling a total of

$15,800. This gives a final adjustment of $64,248. This puts Cory and Tisha into the 15% tax
bracket, which means that their federal tax liability will be equaled to $1,850+($64,248-

$18,150)*15%. This results in a tentative tax liability of $8,729.70. After the tentative tax

liability is calculated, tax credits can be reduced. The Dumonts have a tax credit total of $2,000

due to receiving the child tax credit which allows fillers to take $1,000 off of their tentative tax

liability for every child under their care under the age of 18. This gives the Dumonts a final total

federal income tax liability of $6,729.70.

e. Do the Dumonts qualify for the child tax credit? If so, how will it affect their

federal income tax liability? How will a payment or refund be determined?

The Dumonts do qualify for a child tax credit. This means they will receive tax credits of $2,000

for their two children, since they are both still under the age of 18. This will reduce their income

tax liability from $8,729.70 to $6,729.70. The Dumonts will still require a payment because they

do not have enough reductions and tax credits to reduce their total federal income tax liability to

a negative. If they had more credits earned than tax liabilities, then Cory and Tisha would

receive a tax refund. However, the Dumonts still owe the federal government taxes.

15. Based on the total social security tax, Medicare tax, and federal income tax liabilities

calculated above, how close did Tisha come in estimating their total tax liabilities? How

does the difference between the estimated and actual tax liabilities change their financial

situation? What recommendations would you make?

Cory and Tisha will pay a total of $14,226.70 of Social Security, Medicare, and federal

income tax liabilities. Tisha, luckily, did not come close to estimating their total tax liabilities of

$22,000. The difference in the estimated and actual total tax liabilities is $7,773.30. This

changes their financial situation drastically. This will allow them to have a positive income
available for saving and investment after their expenses. This will allow Cory and Tisha to

continue with daycare for both Chase and Haley, because they will no longer be eating into their

savings in order to cover their expenses. However, they still need to greatly reduce the amount

of rounds of golf they play, because they need to increase their savings quickly. This is due to

the fact that their months living cover expense ratio is still so drastically low. Additionally, Cory

and Tisha now have a positive savings ratio of 0.26%, but they still need to continue to cut costs

wherever possible in order to reach a 10% savings ratio.

16. Calculate and interpret for Cory and Tisha the difference among their marginal average,

and effective marginal tax rates. How might these rates change with life events, such as

salary increases or the purchase of their home?

Cory and Tisha have a marginal average tax rate of 14.52%. This is calculated by dividing their

total tax liabilities of $14,226.70 by their gross income of $98,000. This means that 14.52% of

their total income is going towards taxes. However, their effective marginal tax rate is the rate

that they will be taxed one the next dollar they earn. The Dumonts gross income comes out to

$98,000, which would put them decently inside the 25% tax bracket, therefore with this number

the effective marginal tax rate would be 25%. However, the adjusted income that was used to

calculate the federal income tax will put Cory and Trisha within the 15% tax bracket. If another

dollar was earned, the Dumonts would still be in this 15% bracket. These will change, though,

with certain life events. If there is a great enough salary increase, it can be assumed that both the

marginal average and effective marginal tax rates will both increase. When the Dumonts

eventually purchase their house, with no other changes, only the marginal average tax rate could

potentail decrease. This is due to the fact that they will be able to itemize the mortgage, which

could allow them to deduct more than just the standard deduction.