Rosita's grandmother dies in November 2015 and leaves her an investment portfolio worth $180,000. In January 2016, when Rosita receives ownership to the investments, the portfolio consists of $112,000 of tax-exempt securities and $68,000 of taxable securities. Her grandmother's accountant estimated that the tax-exempt securities would earn $8,175 of interest and the taxable securities would pay $7,140 in dividends in 2016. The management expenses were estimated at $2,100. Rosita, single, has no other investments and earns $55,000 as an engineer. She expects that her itemized deductions, not including the management expenses, will include state income taxes of $2,800; real estate taxes of $1,600; and home mortgage interest of $4,000.
a. What is Rosita's projected taxable income for 2016?
b. Assume that Rosita switches $40,000 from tax-exempt securities to taxable securities and the rate of return on both portfolios remains the same. In switching the securities, Rosita has a $10,000 gain on the sale of the tax-exempt securities and pays $1,500 in tax. Instead of reducing the value of her portfolio, she pays the tax from her other income. All the other information would remain unchanged, except that state income taxes would increase by $500. What is the effect on her taxable income of changing her investment strategy?
c. Should Rosita switch $40,000 in her portfolio from tax-exempt securities to taxable securities? Explain.