Itemized Deductions System for Family Taxation - Case Study Example

Introduction In normal tax deduction systems, taxpayers’ aims at maximizing save in taxes by increasing deductions. Choice of deduction system depends on the amount of deductible expenses, an individual’s objectives, and tax return. Michael and Frances family aims at purchasing a home and ensure maintenance of lower taxable income. To achieve their objective based on the case, the family needs to adopt itemized deduction and close purchase of the home before 2014 that is the next tax return year. The paper reports tax related issues and provides plausible recommendations for the family. Standard deductions Standard deductions based on United States tax law relates to the amount of money subtracted from income of non-itemized citizens. Citizens who claim standard deductions remains barred by tax law from requesting itemized deductions. Normally, standard deduction amount depends on taxpayer’s filing status (Lasser, 2011). In tax systems, filing status can determine if an individual is unmarried or married. Marital status is imperative in determining tax returns in a year. Based on economic state, the standard deduction may change proportionately as inflation. Standard deductions may be of two main types and includes higher and reduced standard deductions. Higher standard deductions results from additional deductions amount mainly for taxpayers who are blind, age of 65 and above, or both. However, amount of the standard deduction normally reduces if an individual claims dependency on a different person’s tax returns. Itemized deduction Itemized deductions relate to tax deductions on specific expenditures listed in standard A (Form 1040). Normally, taxpayers itemize when total itemized deductions exceed standard deductions. In such cases on itemization, the taxpayer may not have qualified for standard deductions, large dental and medical expenses that have no insurance and limited standard deductions (Murphy and Higgins, 2012). Other conditions for itemization include large contributions to charitable organizations, uninsured casualty and theft, unreimbursed employee expense, and when paying taxes and interest on personal property or home. Local and state incomes, sales tax, home mortgage points, investments interests, and miscellaneous deductions also qualify for expenditures. Examination of Items for claiming Michael and Frances should adopt itemization deduction strategy to enable them save in taxes. Adopting itemization deduction strategy would require use of schedule A (Form 1040) (Ernst and Bernstein, 2013). Based on the schedule A (Form 1040) the items that Michael and Frances would claim includes real property tax, interest on home mortgage, and unreimbursed medical expenses. Other items include unreimbursed employee business expenses and charitable contributions. Situation in 2013 and 2014 The family has to remit tax returns yearly. Tax law system demands that expenses incurred in 2013 would only remain deducted in the following year’s tax returns. The family needs to close purchase their home in 2013 and consequently file a tax return in 2014. The strategy would help Michael and Frances realize higher savings and lower taxable income by increasing total number of deductions for the subsequent tax returns in 2014. Taxable Income Table 2013 Taxable Income Calculation Table Tax rate Single filers Married filing jointly or qualifying widow(er) Head of household 10% $0 to $8,925* $0 to $17,850* $0 to $12,750* 15% $8,925* to $36,250: $17,850* to $72,500 $12,750* to $48,600 25% $36,250 to $87,850 $72,500 to $146,400: $48,600 to $125,450 28% $87,850 to $183,250 $146,400 to $223,050: $125,450 to $203,150 33% $183,250 to $398,350 $223,050 to $398,350 $203,150 to $398,350 35% $398,350 to $400,000 $398,350 to $450,000 $398,350 to $425,000 39.6% $400,000+ $450,000+ $425,000+ 2014 Taxable income calculation table Tax rate Single filers Married filing jointly or qualifying widow(er) Married filing separately Head of household 10% Up to $9,075 Up to $18,150 Up to $9,075 Up to $12,950 15% $9,076 - $36,900 $18,151 - $73,800 $9,076 - $36,900 $12,951 - $49,400 25% $36,901 - $89,350 $73,801 - $148,850 $36,901 - $74,425 $49,401-$127,550 28% $89,351 - $186,350 $148,851 - $226,850 $74,426 - $113,425 $127,551 - $206,600 33% $186,351 - $405,100 $226,851 - $405,100 $113,426 -$202,550 $206,601- $405,100 35% $405,101 - $406,750 $405,101 - $457,600 $202,551 - $228,800 $405,101 - $432,200 39.6% $406,751 or more $457,601 or more $228,801 or more $432,201 or more Another issue: Personal Exemptions According to Erb, 2014 personal exemption amounts to 3, 950 dollars in 2014 an increase of 50 dollars from 2013. For married couples including Michael and Frances, personal exemption amounts phase-outs starts with adjusted gross income of 305, 050 dollars. Consequently, the family would not claim personal exemptions due to their low AGI that is about $145,000 compared to the minimum required by tax system in 2014 (Erb, 2014). Recommendations The family has a joint tax return and consequently home ownership. They need to itemize deductions based on federal schedule A (Form 1040). Using itemized deductions strategy would enable the family to deduct interest from mortgages, property taxes, and other itemized expenses (Smith, Raabe, and Maloney, 2013). Consequently, the total deductions will up more than standard deductions and consequently result into lower taxable income. The family should use form 1040 in itemizing all their deductions. Use of schedule A form would help the family to calculate itemized tax reductions (Whittington and Delaney, 2010). In a normal tax system, all taxes remains payable at the end of every year. Deductions of expenses paid in such cases occur only in the subsequent year of tax returns. For a family to realize lower taxable income they need to increase total deduction above standard deductions, and close property purchase during the fourth week of December 2013. It is imperative that closing the purchase in 2013 would enable the family to increase amount of itemized tax deductions and consequently realize lower taxable income in January 2014 joint tax returns. Realization of lower taxable income would remain possible because tax systems deduct such mortgage expenditures when calculating tax returns. References Erb, Philips K. (2013). IRS Announces 2013 Tax Rates, Standard Deduction Amounts And More. Forbes. Web. November 5, 2014. Retrieved from http://www.forbes.com/sites/kellyphillipserb/2013/01/15/irs-announces-2013-tax-rates-standard-deduction-amounts-and-more/ Erb, Philips K. (2014). IRS Announces 2014 Tax Rates, Standard Deduction Amounts And More. Forbes. Web. November 5, 2014. Retrieved from http://www.forbes.com/sites/kellyphillipserb/2013/10/31/irs-announces-2014-tax-brackets-standard-deduction-amounts-and-more/ Ernst & Young., & Bernstein, P. W. (2013). The Ernst & Young tax guide 2013. New York: Wiley. Lasser, J. K. (2011). J.K. Lasser's your income tax 2012: For preparing your 2011 tax return. Hoboken: John Wiley & Sons. Murphy, K., & Higgins, M. (2012). Concepts in Federal Taxation 2013. London: Cengage Learning. Smith, J., Raabe, W., & Maloney, D. (2013). South-Western Federal Taxation 2014: Taxation of Business Entities. London: Cengage Learning. Whittington, R., & Delaney, P. R. (2010). Wiley CPA exam review 2011. Hoboken, NJ: Wiley. Read More