Raj and Kavitha Rao are a married couple in their early 20s living in Denver. Raj earned $53,000 in 2011 from his job as a sales assistant. During the year, his employer withheld $4,975 for income tax purposes. In addition, the Raos 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 2011, the Raos sold two stocks, A and B. Stock A was sold for $700 and had been purchased 4 months earlier for $800. Stock B was sold for $1,500 and had been purchased 3 years earlier for $1,100. Their only child, Mahesh, age 2, received (as his sole source of income) dividends of $200 on stock of Hershey.
Although Raj is covered by his company's pension plan, he plans to contribute $5,000 to a traditional deductible IRA for tax year 2011. Here are the amounts of money paid out during the year by the Raos:
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, Raj incurred some unreimbursed travel costs for an out-of-town business trip:
Airline ticket $250
Taxis 20
Lodging 60
Meals (as adjusted to 50% of cost) 36
Total $366
Critical Thinking Questions
1. Using the Raos' information, determine the total amount of their it?oX}ed deductions. Assume that they'll use the filing status of married filing jointly, the standard deduction for that status is $11,600, and each exemption claimed is worth $3,700. Should they itemize or take the standard deduction? Prepare a joint tax return for Raj and KavithaRao for the year ended December 31, 2011, that gives them the smallest tax liability. Use the appropriate tax rate schedule provided in IRS Publication 1040 including instructions to calculate their taxes owed.
2. How much have you saved the Raos through your treatment of their deductions?
3. Discuss whether the Raos need to file a tax return for their son.
4. Suggest some tax strategies the Raos might use to reduce their tax liability for next year.