Meet Valerie & Stephen McNamara
Tax Planning Clients
Valerie (age 52) & Stephen (age 55) McNamara have been married for 25 years and have one adult child, Tom, who is living on his own. They purchased their current home 7 years ago for $550,000.
Valerie & Stephen 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 |
| Stephen’s Earnings | $100,000 |
| Valerie’s Earnings | $120,000 |
| Federal Tax Withholdings | $22,700 |
| State Income Tax Withholdings | $11,750 |
| 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 (original mortgage on home valued at 500,000.) | $12,500 |
| Real Estate Taxes Paid | $16,500 |
| Charitable Contributions | $1,000 |
| Unreimbursed Medical Expenses | $2,800 |
| Stock Ownership: Union Motor Company (purchased 9 months ago & which they still hold) | Current Value: $4,000
Cost basis: $10,000 |
| Whole Life Insurance Policy | Face Value: $100,000
Cash Value: $8,800 Owner: Stephen Beneficiary: Valerie Insured: Stephen Policy Dividend: $300 |
The McNamaras itemized deductions for their federal return last year. Currently, neither Valerie nor Stephen 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 Valerie’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.
Please use this data to answer the questions in the Case Analysis. Show all formulas and computations. Justify all your responses completely. The Tax Tables are attached in the Appendix.
- Compute the McNamara’s AGI. Show your work.
- If Stephen were to pass away this year, would Valerie be required to claim the face value of the life insurance received for federal income tax purposes? Explain.
- Will their state tax refund be included in the McNamara’s gross income for 2017? Explain your response.
- Will the capital loss in Union Motors be included in the McNamara’s gross income in 2017? Explain your response.
- Will dividends earned on the insurance policy be included in the McNamara’s gross income this year? Explain your response.
- Should the McNamaras itemize deductions for 2018 or take the standard deduction? Show your computations.
- If Valerie and Stephen donate their Union Motor stock to a qualified charity this year, how much could they deduct as a charitable donation? Explain your response.
- If Valerie and Stephen sell their Union Motor stock out right this year, how much could they deduct on their taxes? Explain your response.
- What is the Social Security wage base for OASDI taxes in 2018 for wage earners?
- The McNamaras are considering moving to another state across country where the business climate has improved. If they move in 2018, how much could they deduct as a moving expense deduction if they itemize? Explain your response.
- If the McNamaras want to contribute the maximum allowable amount to a Roth IRA, what would the tax benefits be this year? Explain your response.
- If the McNamaras want to contribute the maximum allowable amount to a regular IRA, what would the tax benefits be this year? Explain your response.
- Stephen is considering changing jobs. The new employer offers a Section 125 plan. Would Stephen benefit by participating in this? Why or why not? Explain your response.
- If a 401(k) plan were available to Valerie or Stephen, should they take advantage of it? If so, how much should they contribute? What effects would that have on their adjusted gross income? Explain your response. Show your computations.
- Valerie’s Uncle Bill won money in the lotto and gave Valerie a check for $25,000. Does this money count as taxable income to the McNamaras? Explain your response.
- If the McNamaras file for divorce and the court orders Stephen to pay alimony in the amount of $700 per month for 15 years or until Valerie dies, can the McNamaras file jointly if the divorce is not final at the end of the year? Explain your response.
- If the McNamara’s divorce is finalized after 12/31/18, would Valerie need to report the alimony received when she files her taxes? Explain your response.
APPENDIX
INCOME TAX RATES SCHEDULES (2018)
SINGLE
| Taxable Income | Tax on Lower Amount | Tax Rate on Excess |
| $0 – $9,525 | $0 | 10.0% |
| $9,526 – 38,700 | 952.50 | 12.0% |
| 38,701 – 82,500 | 4,453.50 | 22.0% |
| 82,501 – 157,500 | 14,089.50 | 24.0% |
| 157,501 – 200, | 32,089.50 | 32.0% |
| 200,201 – 500,000 | 45,689.50 | 35.0% |
| 500,501 + . . . | 150,689.50 | 37.0% |
| Standard Deduction | 12,000 |
MARRIED FILING JOINTLY AND SURVIVING SPOUSES
| Taxable Income | Tax on Lower Amount | Tax Rate on Excess |
| $0 – $19,050 | $0 | 10.0% |
| 19,051 – 77,400 | 1,905.00 | 12.0% |
| 77,401 – 165,000 | 8,907.00 | 22.0% |
| 165,001 – 315,000 | 28,179.00 | 24.0% |
| 315,001 – 400,000 | 64,179.00 | 32.0% |
| 400,001 – 600,000 | 91,379.00 | 35.0% |
| 600,001 + . . . | 161,379.00 | 37.0% |
| Standard Deduction | 12,000 |
HEAD OF HOUSEHOLD
| Taxable Income | Tax on Lower Amount | Tax Rate on Excess |
| $0 – $13,600 | $0 | 10.0% |
| 13,601 – 51,800 | 1,360.00 | 12.0% |
| 51,801 – 82,500 | 5,944.00 | 22.0% |
| 82,501 – 157,500 | 12,698.00 | 24.0% |
| 157,501 – 200,000 | 30,698.00 | 32.0% |
| 200,201 – 500,000 | 44,298.00 | 35.0% |
| 500,001 – . . . | 149,298.00 | 37.0% |
| Standard Deduction | 18,000 |
