In this case you are presented with a fact pattern for a taxpayer with various tax planning needs. Given the tax facts and the financial situation of this individual, you are to answer several questions regarding his tax status and to evaluate how he might apply the various strategies and tactics described in this assignment to improve his tax situation.

CASE NARRATIVE

Paul Stephowski is a single, 39-year old attorney with a medium-sized law firm in Philadelphia. He earned $49,000 this year and anticipates that his earnings will substantially increase within the next few years.

Paul entered the legal profession later than most attorneys. He spent 5 years in the Navy before entering college at the age of 24. After graduating from college with a degree in English he worked as an editor at Harper House publishers. At the age of 31 he was accepted at William Mitchell School of Law and completed his law study 3 years later. He passed the bar exam immediately after graduation and went to work for a large law firm in his hometown. After 2 years he quit this firm and joined a smaller firm where he felt he had more opportunity for advancement. He has been with this firm for 3 years and plans to make his career there.

Paul rents an apartment downtown one block from his office. He enjoys the city lifestyle and especially likes being able to walk to work in 5 minutes any time of the day or year. He finds it very convenient when entertaining clients or potential clients. Paul belongs to the downtown YMCA and to the Main Line Golf and Racquet Club, both of which he uses principally for recreation, although he does occasionally entertain clients or prospective clients at each of the clubs.

Paul has accumulated a modest portfolio of assets consisting of $25,200 in municipal bonds, $31,500 in stock, $7,900 in a NOW account and $11,000 in zero coupon bonds maturing in 15 years for $50,000. He saved very little while in the Service and has only recently finished repaying his student loans for law school. Although he enjoys a fairly comfortable lifestyle, he has some concerns that he may not be investing an adequate proportion of his earning to provide the financial security he desires. He also feels that as his income rises his tax burden is becoming excessive. The facts he presents are as follows:

Personal facts

Salary $49,000 Single

No dependents

Investment Facts

Dividends 900

Interest on CDs (redeemed early) 475

Long-term capital gain 13,370

Short-term capital loss 2,405

Interest on municipal bonds 1,764

Early withdrawal penalty on CD 213

Other Facts

State sales tax 515

Contribution to charity 3,427

Received for writing a magazine article 50

Winnings in contest 90

Fees paid to professional organizations 203

Paid for continuing education requirements

of state bar 370

Received as damage award for physical

injuries in an auto accident that occurred

the previous year 2,200

Attended a 3-day National Lawyers Guild

conference in Palm Springs in February;

stayed an additional 2 days for a short

golfing vacation

Round-trip airfare 450

Registration fee 1,000

Car rental fees ($32/day) 160

Meals ($42/day) 210

Greens fees and cart rental 100

Room ($110/day) 550

Dues and Fees at Main Line Golf and Racquet

Club 1,875

Dues and fees at YMCA 350

Federal tax withheld 14,750

State and local taxes withheld 2,460

Medical premiums 420

Requirements for Answering the Case

On the basis of the facts as presented, answer the following questions. (You need not be familiar with all the specific tax forms used when actually filing the return.)

1. Determine total income (from all sources).

2. List the exclusions from income.

3. List the adjustments to income.

4. Compute the adjusted gross income.

5. List the deductions from income.

6. Compute the taxable income.

7. Compute the taxes payable.

8. How might Paul improve his tax situation?