In this case you are presented with a fact pattern for a taxpayer with various tax planning needs. Given the tax facts and the financial situation of this individual, you are to answer several questions regarding his tax status and to evaluate how he might apply the various strategies and tactics described in this assignment to improve his tax situation.
CASE NARRATIVE
Paul Stephowski is a single, 39-year old attorney with a medium-sized law firm in Philadelphia. He earned $49,000 this year and anticipates that his earnings will substantially increase within the next few years.
Paul entered the legal profession later than most attorneys. He spent 5 years in the Navy before entering college at the age of 24. After graduating from college with a degree in English he worked as an editor at Harper House publishers. At the age of 31 he was accepted at William Mitchell School of Law and completed his law study 3 years later. He passed the bar exam immediately after graduation and went to work for a large law firm in his hometown. After 2 years he quit this firm and joined a smaller firm where he felt he had more opportunity for advancement. He has been with this firm for 3 years and plans to make his career there.
Paul rents an apartment downtown one block from his office. He enjoys the city lifestyle and especially likes being able to walk to work in 5 minutes any time of the day or year. He finds it very convenient when entertaining clients or potential clients. Paul belongs to the downtown YMCA and to the Main Line Golf and Racquet Club, both of which he uses principally for recreation, although he does occasionally entertain clients or prospective clients at each of the clubs.
Paul has accumulated a modest portfolio of assets consisting of $25,200 in municipal bonds, $31,500 in stock, $7,900 in a NOW account and $11,000 in zero coupon bonds maturing in 15 years for $50,000. He saved very little while in the Service and has only recently finished repaying his student loans for law school. Although he enjoys a fairly comfortable lifestyle, he has some concerns that he may not be investing an adequate proportion of his earning to provide the financial security he desires. He also feels that as his income rises his tax burden is becoming excessive. The facts he presents are as follows:
Personal facts
Salary $49,000 Single
No dependents
Investment Facts
Dividends 900
Interest on CDs (redeemed early) 475
Long-term capital gain 13,370
Short-term capital loss 2,405
Interest on municipal bonds 1,764
Early withdrawal penalty on CD 213
Other Facts
State sales tax 515
Contribution to charity 3,427
Received for writing a magazine article 50
Winnings in contest 90
Fees paid to professional organizations 203
Paid for continuing education requirements
of state bar 370
Received as damage award for physical
injuries in an auto accident that occurred
the previous year 2,200
Attended a 3-day National Lawyers Guild
conference in Palm Springs in February;
stayed an additional 2 days for a short
golfing vacation
Round-trip airfare 450
Registration fee 1,000
Car rental fees ($32/day) 160
Meals ($42/day) 210
Greens fees and cart rental 100
Room ($110/day) 550
Dues and Fees at Main Line Golf and Racquet
Club 1,875
Dues and fees at YMCA 350
Federal tax withheld 14,750
State and local taxes withheld 2,460
Medical premiums 420
Requirements for Answering the Case
On the basis of the facts as presented, answer the following questions. (You need not be familiar with all the specific tax forms used when actually filing the return.)
1. Determine total income (from all sources).
2. List the exclusions from income.
3. List the adjustments to income.
4. Compute the adjusted gross income.
5. List the deductions from income.
6. Compute the taxable income.
7. Compute the taxes payable.
8. How might Paul improve his tax situation?