Assignment 1: Assisting A Family With Their Tax Returns ✓ Solved
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Assignment 1: Assisting a Family with their Tax Returns
Imagine that you are preparing taxes for a local tax service provider. A married couple named Judy and Walter Townson have come to you to seeking assistance with their federal income taxes. During your meeting with the Townsons, you gather the following information:
- They are both 55 years of age.
- They have two daughters and one son. One daughter (age 25) is married with children. One daughter (age 20) is living at home and attending college.
- Their son (age 16) is a junior in high school.
- They are currently paying for their college-student daughter to attend school full time.
- Judy is employed as a teacher and makes $60,000 a year. She used $500 of her personal funds to purchase books and other supplies for her classroom.
- Walter is employed as a CPA and makes $100,000 a year.
- They provided you a 1099-INT which reported $4,500 in interest, of which $500 was savings bond interest.
- They provided you a 1099-DIV which reported $300 in dividends.
- They received a state tax refund last year of $385.
- They provided you a list of expenses including:
- Doctor’s bills, $800
- Prescriptions, $400
- New glasses, $2,000
- Dental bills, $560
- Braces, $5,000
- Property taxes for their two cars of $800, which included $50 in decal fees
- Real estate taxes of $4,500
- Mortgage interest of $12,000
- Gifts to charities, $1,000
- GoFundMe contribution to local family in need, $100
- Tax preparation fees for last year’s taxes, $400
Consider the most beneficial way for Judy and Walter to file their federal income tax return. Prepare a brief written summary that addresses the following:
- Estimated taxable income for Judy and Walter (please show computations).
- Summary of tax return, including any suggestions or tax planning considerations.
- Explain how you determined the filing status, dependents, and use of standard/itemized deduction.
The summary should be no more than 500 words.
Paper For Above Instructions
In preparing Judy and Walter Townson’s federal income tax return, one must consider all available information and deductions that apply to their situation. Both Judy and Walter are married, and thus they have the option of filing as “Married Filing Jointly,” which is typically advantageous due to tax rates and deductions.
Calculating Estimated Taxable Income
The following steps outline the calculation of estimated taxable income:
Step 1: Calculate Gross Income
Judy’s income: $60,000
Walter’s income: $100,000
Interest Income from 1099-INT: $4,500
Dividends from 1099-DIV: $300
Total Gross Income = $60,000 + $100,000 + $4,500 + $300 = $164,800
Step 2: Identify Deductions
The Townsons have a choice between standard and itemized deductions. For the tax year 2022, the standard deduction for Married Filing Jointly is $25,900. However, we will calculate itemized deductions to understand the most beneficial filing method.
Itemized deductions include:
- Real estate taxes: $4,500
- Mortgage interest: $12,000
- Gifts to charities: $1,000
- Tax preparation fees: $400
- Medical expenses (only the portion exceeding 7.5% of AGI):
- Doctor’s bills: $800
- Prescriptions: $400
- New glasses: $2,000
- Dental bills: $560
- Braces: $5,000
Total Medical Expenses = $800 + $400 + $2,000 + $560 + $5,000 = $8,760. The AGI is $164,800, and the amount exceeding 7.5% of AGI (0.075 x 164,800 = $12,360) is $0, so no medical expenses can be deducted.
Total Itemized Deductions = $4,500 + $12,000 + $1,000 + $400 + $0 = $17,900
Step 3: Determine Taxable Income
Taxable Income = Gross Income - Deductions
Taxable Income = $164,800 - $17,900 = $146,900
Summary of Tax Return and Suggestions
The estimated taxable income for Judy and Walter Townson is $146,900. Given their financial and familial circumstances, it is strongly suggested that they maximize their deductions. They should consider making pre-tax contributions to retirement accounts or Health Savings Accounts (HSAs) if eligible, which may reduce their taxable income further. Additionally, they could take advantage of tax credits available for dependent children (such as the Child Tax Credit for their 16-year-old son), which can directly reduce their tax liability. This credit is worth $2,000 per qualifying child under the age of 17.
Filing Status, Dependents, and Deductions
Judy and Walter will file as “Married Filing Jointly,” which is beneficial due to the lower tax rate compared to filing separately. They can claim their son (age 16) as a dependent since he is under 19 and lives at home, and their daughter (age 20), who is a full-time student and lives at home, can also be counted as a dependent, providing further potential tax benefits. The decision to itemize deductions rather than taking the standard deduction is based on their total eligible expenses exceeding the standard deduction amount.
In conclusion, careful planning and consideration of all deductions and credits available will be crucial for Judy and Walter to file an efficient and beneficial tax return. Taking proactive steps toward managing deductions and seeking potential credits can significantly optimize their tax situation.
References
- Internal Revenue Service. (2022). Federal Income Tax Guide.
- Burman, L. E., & Smeeding, T. M. (2019). Tax Policy, Tax Systems, and Tax Redistribution. National Tax Journal.
- Wagner, W. R. (2021). The Taxpayer’s Comprehensive Guide to Deductions. Tax Advisor Journal.
- Tax Foundation. (2022). Overview of State Tax Refunds. Retrieved from [URL]
- National Association of Tax Professionals. (2022). Tax Planning Strategies for Families. Retrieved from [URL]
- Pew Research Center. (2021). The Impact of Family Structure on Taxation. Retrieved from [URL]
- American Institute of CPAs. (2022). Guide to Filing Taxes as a Family. Retrieved from [URL]
- IRS. (2022). Child Tax Credit: What You Need to Know. Retrieved from [URL]
- National Taxpayer Advocate. (2022). Annual Report: Taxpayer Rights and Education. Retrieved from [URL]
- Schmidt, J. M. (2021). Understanding Tax Deductions for Families. Family Financial Planning Journal.
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