Nick and Jolene are married. Nick is 61 and retired in 2012 from his job with Amalgamated Company. Jolene is 56 and works part-time as a special education teacher. Nick and Jolene have a substantial amount of investment savings and would like to reorganize it to achieve the best after-tax return on their investments. They give you the following list of projected cash receipts for 2013:

Jolene's salary $13,000

Nick's pension-fully taxable 12,500

Interest income 4,000

Dividend income 2,500

Social Security benefits 7,000

Farmer's Fund annuity 6,000

In addition, Nick tells you that he owns a duplex that he rents out. The duplex rents for 2013 are $18,000, and Nick estimates expenses of $22,000 related to the duplex. The annuity was purchased 18 years ago for $20,000, and pays $500 per month for 10 years.

Nick and Jolene's investments consist of the following:

6-month certificates of deposit (CDs) $100,000

1,000 shares of Lardee's common stock (current

market value = $7 per share, projected 2013

dividend = $1 per share)

cost 10,000 2,000 shares of Corb Company common stock (current

market value = $20 per share, projected 2013 dividend = $.75 per share)

cost 20,000

a. Assuming that Nick and Jolene have total allowable itemized deductions of $12,350 in 2013 and that they have no dependents, determine their 2013 taxable income and tax liability based on the projections they gave you.

b. The 6-month CDs consist of two $50,000 certificates, both of which yield 4% interest. One CD matures on January 3, 2013. Nick's banker tells him that he can renew the CD for one year at 4%. Nick's stockbroker tells him that he can purchase tax-exempt bonds with a yield of 3%. Nick would like you to determine whether the tax-exempt bonds provide him a better after-tax return than the CD.