Becky graduated from a Midwestern college in 2000 and began work as a marketing manager trainee for a large consumer products company. Becky had never prepared her own tax return before, but she was determined to do it for the first time. Becky got all pertinent information together, and it appears as follows:
Data on two W-2 forms showed wages of $24,000 and federal income tax withheld of $1,600. In addition, they showed she paid $600 in state and city income taxes and $1,836 in FICA taxes.
Becky paid most of her bills with checks and kept all canceled receipts for purchases. Examination of these and her check stubs show the following major classifications of expenses: rent = $5,000; qualified charitable contributions = $500; interest on installment loans = $1,900; food and clothing = $8,000; dues to professional marketing society = $200; hospital and doctor's bills = $1,000; state sales tax = $600; contributions to a political candidate in her hometown = $110; contributions to a panhandler she often sees outside the office of the political candidate = $50.
Questions: Beck wants to file a return that will minimize her current year tax liability. If Becky itemized personal expenses, how much can she deduct? Assume the standard deduction applicable to Becky is $5,000. Should she itemize or take the standard deduction?
In the United States there are many different types of deductions. One may choose between a standard deduction or itemized deductions.
Some deductions are aimed at individuals; many are directed to businesses. The complicated maze of tax deductions that Congress has instituted over the past 70 years has contributed to the view that the tax code in the United States needs to be completely redone in a simpler fashion.
Common examples of tax deductions for individuals follow. Each of these deductions may or may not be appropriate, given a taxpayer's filing status, income, and so forth, and may have separately calculated limits (dollars or percent of expense or percent of AGI, etc), or be carried from one year to the next.
* An exemption amount for the taxpayer, the spouse, each child, and any other qualified dependents, and certain disabilities;
* Mortgage interest paid on one's primary residence or other residence;
* Equity loan or Line of Credit ...
The solution provides detailed instructions and explanations for the problem.