Question

3.1 The Andersons Tackle Their Tax Return
(PLEASE SHOW ALL CALCULATIONS)

Noah and Olivia Anderson are a married couple in their early 20s living in Dallas. Noah Anderson earned $73,000 in 2014 from his sales job. During the year, his employer withheld $9,172 for income tax purposes. In addition, the Andersons received interest of $350 on a joint savings account, $750 interest on tax-exempt municipal bonds, and dividends of $400 on common stocks. At the end of 2014, the Andersons sold two stocks, A and B. Stock A was sold for $700 and had been purchased four months earlier for $800. Stock B was sold for $1,500 and had been purchased three years earlier for $1,100. Their only child, Logan, age 2, received (as his sole source of income) dividends of $200 from Hershey stock.

Although Noah is covered by his company’s pension plan, he plans to contribute $5,000 to a traditional deductible IRA for 2014. Here are the amounts of money paid out during the year by the Andersons:

Medical and dental expenses (unreimbursed)      $200

State and local property taxes $831                      

Interest paid on home mortgage                         $4,148  

Charitable contributions    $1,360

Total $6,539

In addition, Noah incurred some unreimbursed travel costs for an out-of-town business trip:

Airline ticket       $250

Taxis                  $20

Lodging $60

Meals (as adjusted to 50 percent of cost)             $36

Total $366

1. Using the Andersons’ information, determine the total amount of their itemized deductions. Assume that they’ll use the filing status of married filing jointly, the standard deduction for that status is $12,400, and each exemption claimed is worth $3,950. Should they itemize or take the standard deduction? Prepare a joint tax return for Noah and Olivia Anderson for the year ended December 31, 2014, that gives them the smallest tax liability. Use the appropriate tax rate schedule provided in Exhibit 3.3 to calculate their taxes owed.

2. How much have you saved the Andersons through your treatment of their deductions?

3. Discuss whether the Andersons need to file a tax return for their son.

4. Suggest some tax strategies that the Andersons might use to reduce their tax liability for next year.

(PLEASE SHOW ALL CALCULATIONS, THANK YOU)

Answer 1

1) Determining the Total Amount of Their Itemized Deductions:

Medical and dental expenses (unreimbursed)	$200 less 10% of AGI, thus 0 deductible
State and local property taxes	831
Interest paid on home mortgage	4,148
Charitable contributions	1,360
Employee business expense	Travel costs 366 less 2% of AGI, thus 0 deductible
Total Itemized Deductions	$6,339 - Standard is higher

2) Determining the Amount that you have saved the Andersons through your treatment of their deductions:

If they itemized, the deductions would be	$6,339
Standard deduction for married couple is	$12,400
Addition deductions equal	$6,061
Marginal tax rate is	25%
Taxes saved by taking standard deduction	$1,515

3) A Taxpayer can claimed as a Dependent on another’s tax return and receiving unearned income of Standard Deduction of $1,000. Logan’s inc ome is only $200 and he is not required to file tax return.

4) They can increase the Amount of their IRA deduction. Noah Can contribution another $500, Total of $5,500 in 2015. Olivia can make a contribution to an IRA of $5,500. They have to review the Transactions once again to Recognize the other deductions that they might have missed.