Finance Basics

Donna (age 49) & Danny (age 52) Sommer have been married for 25 years and have one adult child, Sam, who is living on his own.

Donna & Danny file joint tax returns. The table below summarizes their financial data for tax purposes. Use this information when you are answering the questions that follow.

Tax Item	Amount
Danny's Earnings	$100,000
Donna's Earnings	$105,000
Federal Tax Withholdings	$22,700
State Income Tax Withholdings	$10,750
FICA & M/C	$15,683
Savings Account Interest (2.5% per year)	$1,800
State Refund from Prior Year	$1,200
Home Mortgage Interest Paid	$12,500
Real Estate Taxes Paid	$15,500
Charitable Contributions	$1,500
Unreimbursed Medical Expenses	$800
Stock Ownership: Union Motor Company (purchased 9 months ago & which they still hold)	Current Value: $4,000 Cost basis: $8,000
Whole Life Insurance Policy	Face Value: $100,000 Cash Value: $8,800 Owner: Danny Sameficiary: Donna Insured: Danny Policy Dividend: $300

The Sommers itemized deductions for their federal return last year. Currently, neither Donna nor Danny has access to a qualified retirement plan through their work and they have not funded IRAs up to this point in time. They have access to a Section 125 flexible spending account through Donna's employer. To date, they have not funded the account. Open enrollment is coming up and lasts for the next 30 days. For purposes of solving this case, use the tax information shown below.

MARRIED FILING JOINTLY

Taxable Income	Tax on Lower Amount	Tax Rate on Excess
$0 - $17,850	$0	10.0%
17,850 - 72,500	1,785.00	15.0%
72,500 - 146,400	9,982.50	25.0%
146,400 - 223,050	28,457.50	28.0%
223,050 - 398,350	49,919.50	33.0%
398,350 - 450,000	107,768.50	35.0%
451,000 - . . .	125,846.00	39.6%
Standard Deduction	12,200
Personal Exemption	3,500

Please use this data to answer the questions in the Case Analysis. Show all formulas and computations. Justify all your responses completely.

1. Compute the Sommer's AGI. Show your work.

2. If Danny were to pass away this year, would Donna be required to claim the face value of the life insurance received for federal income tax purposes? Explain.

3. If the Sommers want to reduce gross income for tax purposes, what would you advise them to do to cover the cost of unreimbursed medical expenses?

4. Donna and Danny are considering moving their savings account balance to a municipal bond mutual fund which currently pays 2% dividends per year. Would you advise them to do so? Why or why not? Show your work.

5. If the Sommers invest in the municipal bond mutual fund, will the interest and capital appreciation be subject to income tax? Explain your response.

6. Will their state tax refund be included in the Sommer's gross income this year? Explain your response.

7. Will the capital loss in Union Motors be included in the Sommer's gross income this year? Explain your response.

8. Will dividends earned on the insurance policy be included in the Sommer's gross income this year? Explain your response.

9. Should the Sommers itemize deductions this year or take the standard deduction? Why? Show your computations.

10. If Donna and Danny donate their Union Motor stock to a qualified charity this year, how much could they deduct as a charitable donation? Explain your response.

11. If Donna and Danny sell their Union Motor stock this year, how much could they deduct? Explain your response.

12. The Sommers are considering moving to another state across country where the business climate has improved. If they move, can they deduct the real estate expenses on the sale of their current home as a moving expense deduction? Explain your response.

13. If the Sommers move to another state, can the cost of travel expenses, such as lodging while in transit, be deductible as a moving expense? Explain your response.

14. If the Sommers want to contribute the maximum allowable amount to a Roth IRA, what would the tax benefits be this year? Explain your response.

15. If the Sommers want to contribute the maximum allowable amount to a regular IRA, what would the tax benefits be this year? Explain your response.

16. Danny is considering changing jobs. The new employer offers a Section 125 plan. Should Danny consider this benefit as part of his overall compensation? Why or why not? Explain your response.

17. If a 401(k) plan were available to Donna or Danny, should they take advantage of it? What effects would that have on their adjusted gross income? Explain your response. Show your computations.

18. Donna's Uncle Bill won money in the lotto and gave Donna a check for $25,000. Does this money count as taxable income to the Sommers? Explain your response.

19. If the Sommers file for divorce and the court orders Danny to pay alimony in the amount of $700 per month for 15 years or until Donna dies, can the Sommers file jointly if the divorce is not final at the end of the year? Explain your response.

20. Does Donna need to report the alimony received and any child support payments when she files her taxes? Explain your response.