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Case

The Andersons Tackle Their Tax Return

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

Critical Thinking Questions

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.

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