# finance homework

The Raos Tackle Their Tax Return

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 itemized 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 Kavitha Rao 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.