1. Is Martha's unreimbursed medical expense deductible on the Neals' tax return? Why?
2. Is Martha required to file a tax return? Why or why not?
3. What tax advantage(s), attributable to Holly's education expenses, can the Neals include on their return?
4. How much of the total medical expenses will the Neals be able to deduct on their taxes?
5. Can the Neals' IRA contributions be deducted on their tax return? If so, to what extent?
6. Would the Neals benefit from itemizing their deductions? Why?
7. Calculate the Neals'total 2014 tax liability using the method most advantageous to them.
8. Should Zach have his employer adjust his federal tax withholding amount? Why or why not?
Holly and Zachary Neal, from Dublin, Virginia, are preparing to file their 2014 income taxes. Their children are grown; however, Holly's mother, Martha, has moved in with them, so Holly is no longer working. Martha is dependent on their income for support except for her $536 monthly Social Security benefit.
Zachary works for a software company and earns enough to keep their heads above water; however, he had to discontinue participation in his retirement plan so they could pay the bills. Holly is taking this opportunity to work toward her master's degree. They know they will file jointly but need your help preparing their federal tax return. They have gathered all of the appropriate records, as follows:
1099-DIV, Capital Gains, short-term ………………………………….. $900
Zachary's W-2, Wage and Tax Statement ……………………………… $54,500
Gambling winnings ……………………………………………………. $1,500
Inheritance …………………………………………………………….. $35,000
Holly's and Zach's aggregate traditional IRA contribution …………… $5,000
Martha's unreimbursed medical expenses …………………………….. $5,100
The Neals' unreimbursed medical expenses …………………………… $1,700
Martha's total living expenses, excluding medical …………………….. $13,000
State taxes withheld and owed ……………………………………….. $2,280
Mortgage interest expense ……………………………………………. $6,000
Holly's student loan interest payments ………………………………. $590
Holly's education expense ……………………………………………. $5,450