Lillian and Jackson Clark are a married couple in their early 20s living in Los Angeles. Jackson Clark earned $93,000 in 2018 from his job as a sales assistant. During the year, his employer withheld $11,685 for income tax purposes. In addition, the Clarks received interest of $350 on a joint savings account, $750 interest on tax-exempt municipal bonds, and dividends of $400 on common stocks. At the end of 2018, the Clarks sold two stocks, A and B. Stock A was sold for $700 and had been purchased four months earlier for $800. Stock B was sold for $1,500 and had been purchased three years earlier for $1,100. Their only child, Carter, age 2, received (as his sole source of income) dividends of $200 from Hershey stock.

Although Jackson is covered by his companys pension plan, he plans to contribute $5,500 to a traditional deductible IRA for 2018. Here are the amounts of money paid out during the year by the Clarks:

Medical and dental expenses (unreimbursed) $ 200

State and local property taxes 831

Interest paid on home mortgage 4,148

Charitable contributions 1,360

Total $6,539

In addition, Jackson incurred some unreimbursed travel costs for an out-of-town business trip:

Airline ticket $250

Taxis 20

Lodging 60

Meals (as adjusted to 50 percent of cost) 36

Total $366

Critical Thinking Questions

1. Using the Clarks information, determine the total amount of their itemized deductions. Assume that theyll use the filing status of married filing jointly, the standard deduction for that status is $24,000. Should they itemize or take the standard deduction? Prepare a schedule computing the tax on a joint return for Jackson and Lillian Clark for the year ended December 31, 2018, that gives them the smallest tax liability. Use the appropriate tax rate schedule provided in Exhibit 3.3 to calculate their taxes owed.
2. How much have you saved the Clarks through your treatment of their deductions?
3. Discuss whether the Clarks need to file a tax return for their son.
4. Suggest some tax strategies that the Clarks might use to reduce their tax liability for next year.