Today$$s date is July $1$st$.$ Larry and Lolita Ande, both age forty$-$four, are reviewing their

household tax situation for the current year. Larry and Lolita have been married for a number

of years and have one adult child. Larry and Lolita file their own tax returns. This is the first

year the Andes have run into filing questions. Table II$\mathrm{.}1$ summarizes their financial position for

tax purposes. Use this information to answer the Andes$$ tax questions.

The Andes$$ Annual Tax Position

Tax Item Amount

Larry$$s earnings $$79,000$

Lolita$$s earnings $$43,000$

Federal tax withholdings $$12,300$

State income tax withholdings $$4,100$

State and local sales taxes paid $$2,300$

FICA withholdings $$6,273$

Bank account interest$*$ $$1,600$

State tax refund from previous year $$900$

Home mortgage interest paid $$5,300$

Real estate taxes paid $$1,800$

Charitable contributions $$4,000$

Unreimbursed medical expenses $$800$

Stock ownership: United Motor

Company$**$

Current value: $$4,000$

Basis: $$8,000$

Whole$-$life insurance policy Face value: $$100,000$

Issue date: $7/1/2019$

Monthly premium: $$221$

Cash value: $$7,800$

Owner: Larry

Beneficiary: Lolita

Insured: Larry

Policy dividend: $$300$

$*$Larry and Lolita earn $4\mathrm{.}0$ percent on the bank account balance. In comparison, shortduration municipal bond funds are currently yielding $3\mathrm{.}4$ percent.

$**$Larry and Lolita purchased the stock three months ago and still own the stock today.

The Andes itemized deductions for their federal return last year. Currently, neither Larry nor

Lolita have access to a qualified retirement plan through their work. Neither Larry nor Lolita

have taken steps to fund an IRA up to this point. Lolita has access to a Section $125$ flexible

spending account through her employer. To date, the Andes have not funded the account. Open

enrollment for the Section $125$ account lasts for the next thirty days.

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.

II$.$ 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.

III. If the Andes want to reduce gross income for tax purposes, Larry and Lolita could contribute to a

flexible spending plan to cover the cost of unreimbursed medical expenses.

IV$.$ Although the face value of the life insurance policy can be received tax free by Lolita if Larry were

to pass away, the cash value will be fully taxable as income at the federal level.

a$.$ II only

b$.$ III only

c$.$ I and III only

d$.$ II and IV only

e$.$ II$,$ III, and IV only

$2.$ 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.

II$.$ Interest and capital appreciation from the municipal bond fund is federally income tax exempt.

III. Interest from the bonds will be state income tax free if the bonds held in the fund are from the state

where the Andes live.

IV$.$ Municipal bond interest that is used to reinvest in the fund will grow on a tax$-$free basis.

a$.$ I only

b$.$ III only

c$.$ II and III only

d$.$ 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.

II$.$ 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

b$.$ I and IV only

c$.$ II and III only

d$.$ I, II$,$ 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$.$ It does not matter which deduction amount Larry and Lolita choose because they are equal.

b$.$ Larry and Lolita should claim itemized deductions because this amount is greater than the standard

deduction.

c$.$ Larry and Lolita should claim the standard deduction because this amount is greater than itemizing

deductions.

d$.$ If Larry and Lolita sell the United Motor Company stock, the loss will reduce their itemized 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 Larry and Lolita 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 Larry and Lolita 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 g