Caaez The Ande Case A TAX PLANNING MINI-CASE Today's dateisjuly 1. LarryandlolitaAnde,bothage44,araraviewingthair tax situationforthecurmntyear. Theyhavebemmaredfmanumherofyeusandhave oneadultchild.Theyleleirowntaxmtumamndsiawrsttimatlwyhavehad questions about theirtax situation. TableVISaummarizeatheirnancial poaitimfor taxpurpoaea.Uae this informaon'aoanswertheirtaxquestions. Tabla VLS The Andes' AnnualTax PositiOn Tax Item Amount Lar 'a aarnin-a Lolita'a aarnlns Federal tax withholdln s a _m scaca income tax withhclclna Staca and local salaataxaa aid FICA withthdln a \" Bank account interest\" State tax refund from - revicua ear Hcma mcrt a-a interact -lcl Real estate taxes laid Charitable ccmrlbutlcna Unraimburaed medical exenaea Stock ownership: United Motor Company" Current value: $4.000 Basie: $8.000 Whole-life insurance policy Face value: $100,000 Cash value: $1800 Owner: Larry Beneciary: Lolita Insured: Larry Poli dividend: $300 *They an rn 4% on th air account balance. Short-duration municipal bond funds are currently yielding 3.4%. "They purchased the stock three months ago and still own the stock today. The Andes itemized deductions for their federal return last year. Currently, neither Lanynorlolitahasaccessto aqualiedretirementplanthmughtiieirworkmndthey have not funded IRAs up to this point. They have access to a 125 exible spending account tluough Lolita's employer. To date, they have not funded the account. Open enrollment for the 125 account lasts for the next 30 days. For the purposes of solving this case, use the tax information shown in Table VIA. lilbIeVM MarginalTax Rats, Deduction, and Exam ption Amounts Taxable Income _ Tax em $16,050 or less 10% $13,050 to $85,100 _ 15% $35,100 to $131,450 25% $131,450 to $200,300 _ 28% $200,300 to $357,700 33% Over $357,700 35% Standard deduction $10,900 Personal exemption $3,500 Please use this infomation to answer the following case questions. Case Questions 1. Which of the following statements is true? I. II. IV. Iflarryweretopassawaythisyear, Iolitawouldberequiredtodaimthefacevalue ofthelifeinsurancereceivedforfederalincometaxpurposes. If Larry uses a transit pass valued at $100 per month given to him by his employer toconunute toand from work, hewillberequired to add thevalue of thepass tohis income for tax purposes. If theAndes wantto reducegroesincome fortaxpurpososheycouldcontrihute toa exible spending plan to cover the cost of mireimbursed medical expenses. Although the face valueofthe lifeinsurance policy wouldbe taxfreetoLoliiaiIIan'y were to pass away, the cash value would be fully taxable as income at the federal level. a. IIonly b. IIIonly c. I and Ill only d. HandIVonly e. Il,]I[,andIVonly 2. Larry and Lolita are considering moving their bank account balance to a safe municipal bond mutual fund. Before making the switch, they should be aware of which of the following? I. Given their federal marginal tax bracket, the bank account provides a higher after-tax yield. 1]. Interest and capital appreciation from the municipal bond fund is federally income tax exempt. Ill. Interest from thebondswillbestate incometax freeifthebondsheldin the fundare from the state where the Andes live. IV. Municipal bond interest thatisused toreinvest inthehmdwillgmwona tax-free basis. a. Ionly b. In only c. II and Ill only (1. II, III, and IV only e. I, II, III, and IV 3. Which of the following tax items will be included when calculating the Andes' gross income this year? I. Lolita's salary. H. The state tax refund from the previous year. III. The capital loss in United Motor Company. IV. Dividends earned, but not received, on the insurance policy. a. I and II only I). I and IV only c. l] and 111 only :1. I, H, and IV only e. I, III, and Iv only 4. The Andes do not know whether they should take the standard deduction or itemize deductions this year. Which of the following statements is true in relation to this issue? a. b. E. It does not matter which deduction amount they choose because they are equal. They should claim itemized deductions because this amount is greater than the standard deduction. They should claim the standard deduction because this amount is greater than itemizing deductions. If they sell the United Motor Company stock, the loss will reduce their itemized deductions, making the standard deduction more attractive. Both c and d are correct. 5. Lolita and Larry are thinking about adding to their family next year. If they do have a child, Lolita plans to be a stay-at-home mom. Larry is concerned about what will happen to their tax situation when Lolita stops working. One issue, in particular, that they would like to discuss with their nancial planner is whether they should sell the United Motor Company stock this year or wait until next year. What is the best recommendation in their situation? a. Theyshouldsemestmksyearwhilemeyammme25%mrginmbraeketbemuse thiswill resultina largerdeduconrtanwaingandsellingwhm theyareinalower bracket. Theyshouldsellthestocknextyear;maldngthededuconmorevaluableasanosetto Lolita's lost income. Theyshouldsellthestockthisyearbecausethefullvalueoftheiosscanbeusedthisyearlno reduce theirgrossincome level. They should sell the stock next year because they currently do not need a tax loss to reduce their reportable income. 6. The Andes have considered moving to another state acmss the country so that Larry can work withhisbrotherlarry and hisbrotherworkin a sinlarbusirtess.1ftheydomove,whichofthe folloWing expenses will be an allowable moving expense deduction? 1. Payment of real estate expenses on the sale of their current home. II. Anyloss thattheyincurwhen seliing d1eirpersonalresidmoe. 1]]. Cost of travel expenses, Such as lodging, while in transit from one town to another. IV. Cost of meals while in transit from one town to another. a. 111 only I). IandIIIonly C. II and 111 only d. 111 and IV only e. H and IV only Which of the following tax planning strategies provides the greatest immediate tax benet for the Andes? a. Contributing the maximum allowable to a Roth IRA. b. Making the maximum allowable deductible contribution to a traditional IRA. (2. Establishing and contributing to an immediate xed annuity. d. Purchasing additional whole-life insurance. Larryisconsidering changingjobs.Apotenlial employer basofferedhimseveral employeebenets that make the job offer very ath-acve. Which of the following empIOyee benet altematives will help reduce the Andes' reportable gross income for federal income tax purposes? I. The immediate right to contribute to a 401(k) plan. II. Employer-pmvided parking. III. Group term life insurance equal to three times salary. IV. The right to contribute to a 5125 plan. a. I only b. I and 11 only c. I and IV only d. I], III, and IV only e. LILIILandIV 9. One month ago Lolita's uncle gave Larry and Lolita a check for$25,000. He said that he had won some money while gambling in Reno. He wanted to share his good fortune with family. Larry is concerned about the tax ramications of this transaction. much statement(s) below is (are) true in this situation? I. Larry and Lolita must pay state and federal income tax on the full $25,000. II. Larry and Lolita must split the tax liability with Lolita's uncle. Il]. Lolita's uncle must pay state and federal income taxes on the winnings. IV. Lolita and Larry need not pay any tax because the $25,000 is a gift. a. I only b. II only c. III only d. H and III only e. III and IV only 10. If Larry and Lolita nalize a divorce this year and the court orders Larry to pay alimony in the amount of $700 per month for six months (through December), and then $700 per month for 15 years or until Lolita dial, which of the following statements will be true? a. Larry and Lolita may not le married ling jointly when completing this year's tax return. b. Lolita must le as. head of household when completing this year's tax return. c. Larry may take a $4,200 deduction from gross income related to the alimony payments. d. Lolita need notreport the alimony paid, or any child support payments, when she les taxes in future years. e. Bothaandcarecorrect