Meet Delilah & Daniel Westerfield

Tax Planning Clients

Delilah (age 49) & Daniel (age 52) Westerfield have been married for 25 years and have one adult child, Alan, who is living on his own.

Delilah & Daniel 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

Daniel’s Earnings $100,000

Delilah’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: Daniel

Beneficiary: Delilah

Insured: Daniel

Policy Dividend: $300

The Westerfields itemized deductions for their federal return last year. Currently, neither Delilah nor Daniel 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 Delilah’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 - $18,550 $0 10.0%

18,551 – 75,300 1,855 15.0%

75,301 – 151,900 10,367.50 25.0%

151,901 – 231,450 29,517.50 28.0%

231,451 – 413,350 51,791.50 33.0%

413,351 – 466,950 111,818.50 35.0%

466,951,000 - . . . 130,578.50 39.6%

Standard Deduction 12,600

Personal Exemption 4,050

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 Westerfield’s AGI. Show your work.

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

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

4. Delilah and Daniel 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 Westerfields 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 Westerfield’s gross income this year? Explain your response.

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

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

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

10. If Delilah and Daniel 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 Delilah and Daniel sell their Union Motor stock this year, how much could they deduct? Explain your response.

12. The Westerfields 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 Westerfields 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 Westerfields 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 Westerfields want to contribute the maximum allowable amount to a regular IRA, what would the tax benefits be this year? Explain your response.

16. Daniel is considering changing jobs. The new employer offers a Section 125 plan. Should Daniel 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 Delilah or Daniel, should they take advantage of it? What effects would that have on their adjusted gross income? Explain your response. Show your computations.

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

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

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