A Single Fathers Tax Situation

A SINGLE FATHERS TAX SITUATION Ever since his wifes death, Eric Stanford has faced difficult personal and financial circumstances. His job provides him with a fairly good income but keeps him away from his daugh- ters, ages 8 and 10, nearly 20 days a month. This requires him to use in-home child care services that consume a major por- tion of his income. Since the Stanfords live in a small apart- ment, this arrangement has been very inconvenient. Due to the costs of caring for his children, Eric has only a minimal amount withheld from his salary for federal income taxes. Thus more money is available during the year, but for the last few years he has had to make a payment in April another financial burden. Although Eric has created an investment fund for his daugh- ters college education and for his retirement, he has not sought to select investments that offer tax benefits. Over- all, he needs to look at several aspects of his tax planning activities to find strategies that will best serve his current and future financial needs. Eric has assembled the following information for the current tax year: Earnings from wages, $42,590 Interest earned on savings, $125 IRA deduction, $2,000 Checking account interest, $65 Three exemptions at $2,750 each Current standard deduction for filing status, $6,350 Amount withheld for federal income tax, $3,178 Tax credit for child care, $400 Filing status: head of household

1. What are Erics major financial concerns in his current situation?

2. In what ways might Eric improve his tax planning efforts?

3. Calculate the following

a. What is Erics taxable income? PLEASE prepare the Form 1040 to show this.

Taxable income is right around $26,000

b. What is his total tax liability? What is his average tax rate?

c. Based on his withholding, will Eric receive a refund or owe additional tax? What is the amount?

Please show this using the Form 1040.