Case 2 The Ande Case A TAX PLANNING MINI-CASE Today's date is July 1. Larry and Lolita Ande, both age 44, are reviewing thei situation for the current year. They have been married for a number of yeats one adult child. They tions about their tax situation. Table V1.3 summarizes their financial position for tax purposes. Use this information to answer their tax questions. ile their own tax returns, and this is the first time they have had Table VI 3 The Andes' Annual Tax Position Amount $50,000 $43,000 $12.300 Tax Item Larry's earnings Lolita's earnings Federal tax withholdings State income tax withholdings State and local sales taxes paid FICA withholdings -Bank account interest $4,100 $2.300 $6.273 $1.600 $900 $5,300 ams t tax refund from previous year Home mortgage interest paid Real estate taxes paid Charitable contributions $1,800 $4,000 $800 Current value: $4,000 Basis: $8,000 Face value: $100,000 Cash value: $7,800 Owner: Larry Beneficiary: Lolita Insured: Larry Policy dividend: $300 Unreimbursed medical expenses Stock ownership: United Motor Company* 04 Wole-life insurance policy "They earn 4% on their account balance. Short-duration municipal bond funds are currently yielding 34%. They purchased the stock three months ago and still own the stock today 747 748 Case Approach to Financial Planning The Andes itemized deductions for their federal return last year. Currently, neither Larry nor Lolita has access to a qualified retirement plan through their work, and they have not funded IRAs up to this point. They have access to a 125 flexible spending account through Lolita's employer. To date, they have not funded the account. Open enrollment for the 125 account lasts for the next 30days. For thepurposesof solving this case, use the tax information shown in Table VI4 Table V1.4 Marginal Tax Rate, Deduction, and Exemption Amounts Taxable Income Tax Rate 10% 15% 25% $16,050 or less $16,050 to ses,100 $65,100 to $131,450 $131,450 to $200,300 S200,300 to $357,700 Over $357,700 | 33% 35% Standard deduction Personal exemption $10.900 $3,500 Please use this information to answer the following case questions. Case Questions 1. Which of the following statements is true? I. If Larry were to pass away this year, Lolita would be required to claim the face value of the life insurance received for federal income tax purposes. If Larry uses a transit pass valued at $100 per month given to him by his employer to commute to and from work, he will be required to add the value of the pass to his income for tax purposes. II. III. If the Andes want to reduce gross income for tax purposes, they could contribute to a flexible spending plan to cover the cost of unreimbursed medical expenses. Although the face value of the life insurance policy would be tax free to Lolita if Larry were to pass away, the cash value would be fully taxable as income at the federal level. IV. a. Il only b. III only c. I and III only 50 Case Approach to Financial Planning 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. It does not matter which deduction amount they choose because they are equal. b. They should claim itemized deductions because this amount is greater than the standard c. They should claim the standard deduction because this amount is greater than itemizing d. If they sell the United Motor Company stock, the loss will reduce their itemized deductions, deduction. deductions. making the standard deduction more attractive. e. 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 financial 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? They should sell the stock this year while they are in the 25% marginal tax bracket because a. this will result in a larger deduction than waiting and selling when they are in a lower bracket. b. They should sell the stock next year, making the deduction more valuable as an offset to c They should sell the stock this year because the full value of the loss can be used this year to d They should sell the stock next year because they currently do not need a tax loss to reduce The Andes have considered moving to another state across the country so that Larry can work Lolita's lost income. reduce their gross income level. their reportable income. 6. with his brother. Larry and his brother work in a similar business. If they do move, which of the following expenses will be an allowable moving expense deduction? I. Payment of real estate expenses on the sale of their current home. IL. Any loss that they incur when selling their personal residence. III. 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. Financial Planning Case Studies 751 III only b Iand Ill only c. Il and III only d. Ill and IV only e. II and IV only 7. Which of the following tax planning strategies provides the greatest immediate tax benefit for the Andes? a. Contributing the maximum allowable to a Roth IRA. b. Making the maximum allowable deductible contribution to a traditional IRA c. Establishing and contributing to an immediate fixed annuity. d. Purchasing additional whole-life insurance. rry is considering changingjobs. Apotentialemployer has offered him severalemployeebenefits that make the job offer very attractive. Which of the following employee benefit alternatives 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-provided parking. III. Group term life insurance equal to three times salary IV The right to contribute to a 125 plan. a. Ionly b. I and II only c. Iand IV only d. II, III, and IV only e. I, II, III, and IV Approach to Financial Planning nth ago Lolita's uncle gave Larry and Lolita a check for $25,000. He said that he had won one my while gambling in Reno. He wanted to share his good fortune with family. Larry is some med about the tax ramifications of this transaction. Which statement(s) below is (are) true in this situation? 1. Larry and Lolita must pay state and federal income tax on the full $25,000 IL. Larry and Lolita must split the tax liability with Lolita's uncie. III. 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. Ionly b. II only c. III only d. II and IlI only e. III and IV only 10. If Larry and Lolita finalize 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 dies, which of the following statements will be true? a. Larry and Lolita may not file married filing jointly when completing this year's tax return. b. Lolita must file 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 not report the alimony paid, or any child support payments, when she files taxes in future years. e. Both a and c are correct. Case 2 The Ande Case A TAX PLANNING MINI-CASE Today's date is July 1. Larry and Lolita Ande, both age 44, are reviewing thei situation for the current year. They have been married for a number of yeats one adult child. They tions about their tax situation. Table V1.3 summarizes their financial position for tax purposes. Use this information to answer their tax questions. ile their own tax returns, and this is the first time they have had Table VI 3 The Andes' Annual Tax Position Amount $50,000 $43,000 $12.300 Tax Item Larry's earnings Lolita's earnings Federal tax withholdings State income tax withholdings State and local sales taxes paid FICA withholdings -Bank account interest $4,100 $2.300 $6.273 $1.600 $900 $5,300 ams t tax refund from previous year Home mortgage interest paid Real estate taxes paid Charitable contributions $1,800 $4,000 $800 Current value: $4,000 Basis: $8,000 Face value: $100,000 Cash value: $7,800 Owner: Larry Beneficiary: Lolita Insured: Larry Policy dividend: $300 Unreimbursed medical expenses Stock ownership: United Motor Company* 04 Wole-life insurance policy "They earn 4% on their account balance. Short-duration municipal bond funds are currently yielding 34%. They purchased the stock three months ago and still own the stock today 747 748 Case Approach to Financial Planning The Andes itemized deductions for their federal return last year. Currently, neither Larry nor Lolita has access to a qualified retirement plan through their work, and they have not funded IRAs up to this point. They have access to a 125 flexible spending account through Lolita's employer. To date, they have not funded the account. Open enrollment for the 125 account lasts for the next 30days. For thepurposesof solving this case, use the tax information shown in Table VI4 Table V1.4 Marginal Tax Rate, Deduction, and Exemption Amounts Taxable Income Tax Rate 10% 15% 25% $16,050 or less $16,050 to ses,100 $65,100 to $131,450 $131,450 to $200,300 S200,300 to $357,700 Over $357,700 | 33% 35% Standard deduction Personal exemption $10.900 $3,500 Please use this information to answer the following case questions. Case Questions 1. Which of the following statements is true? I. If Larry were to pass away this year, Lolita would be required to claim the face value of the life insurance received for federal income tax purposes. If Larry uses a transit pass valued at $100 per month given to him by his employer to commute to and from work, he will be required to add the value of the pass to his income for tax purposes. II. III. If the Andes want to reduce gross income for tax purposes, they could contribute to a flexible spending plan to cover the cost of unreimbursed medical expenses. Although the face value of the life insurance policy would be tax free to Lolita if Larry were to pass away, the cash value would be fully taxable as income at the federal level. IV. a. Il only b. III only c. I and III only 50 Case Approach to Financial Planning 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. It does not matter which deduction amount they choose because they are equal. b. They should claim itemized deductions because this amount is greater than the standard c. They should claim the standard deduction because this amount is greater than itemizing d. If they sell the United Motor Company stock, the loss will reduce their itemized deductions, deduction. deductions. making the standard deduction more attractive. e. 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 financial 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? They should sell the stock this year while they are in the 25% marginal tax bracket because a. this will result in a larger deduction than waiting and selling when they are in a lower bracket. b. They should sell the stock next year, making the deduction more valuable as an offset to c They should sell the stock this year because the full value of the loss can be used this year to d They should sell the stock next year because they currently do not need a tax loss to reduce The Andes have considered moving to another state across the country so that Larry can work Lolita's lost income. reduce their gross income level. their reportable income. 6. with his brother. Larry and his brother work in a similar business. If they do move, which of the following expenses will be an allowable moving expense deduction? I. Payment of real estate expenses on the sale of their current home. IL. Any loss that they incur when selling their personal residence. III. 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. Financial Planning Case Studies 751 III only b Iand Ill only c. Il and III only d. Ill and IV only e. II and IV only 7. Which of the following tax planning strategies provides the greatest immediate tax benefit for the Andes? a. Contributing the maximum allowable to a Roth IRA. b. Making the maximum allowable deductible contribution to a traditional IRA c. Establishing and contributing to an immediate fixed annuity. d. Purchasing additional whole-life insurance. rry is considering changingjobs. Apotentialemployer has offered him severalemployeebenefits that make the job offer very attractive. Which of the following employee benefit alternatives 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-provided parking. III. Group term life insurance equal to three times salary IV The right to contribute to a 125 plan. a. Ionly b. I and II only c. Iand IV only d. II, III, and IV only e. I, II, III, and IV Approach to Financial Planning nth ago Lolita's uncle gave Larry and Lolita a check for $25,000. He said that he had won one my while gambling in Reno. He wanted to share his good fortune with family. Larry is some med about the tax ramifications of this transaction. Which statement(s) below is (are) true in this situation? 1. Larry and Lolita must pay state and federal income tax on the full $25,000 IL. Larry and Lolita must split the tax liability with Lolita's uncie. III. 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. Ionly b. II only c. III only d. II and IlI only e. III and IV only 10. If Larry and Lolita finalize 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 dies, which of the following statements will be true? a. Larry and Lolita may not file married filing jointly when completing this year's tax return. b. Lolita must file 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 not report the alimony paid, or any child support payments, when she files taxes in future years. e. Both a and c are correct