Tax Planning Harvard Case Solution & Analysis

Tax Planning Case Solution

Part 2

Itemized deductions

Itemized deductions help to reduce taxable income and thus, decrease the tax payable. The itemized deductions include the following as per the IRS website(Itemized Deductions , n.d):

Should I Itemize? Topic 501
Medical and Dental Expenses Topic 502
Deductible Taxes Topic 503
Home Mortgage Points Topic 504
Interest Expense Topic 505
Charitable Contributions Topic 506
Miscellaneous Expenses Topic 508
Business Use of Home Topic 509
Business Use of Car Topic 510
Business Travel Expenses Topic 511
Business Entertainment Expenses Topic 512
Work-Related Education Expenses Topic 513
Employee Business Expenses Topic 514
Casualty, Disaster, and Theft Losses (Including Federally Declared Disaster Areas) Topic 515

The best option to increase the itemized deductions is to make charitable contributions. Charitable contributions must be given to registered charities and institutes only. Thus, Bruce can reduce the tax expense for the year through claiming itemized deductions.

Alice is unemployed and would not earn any

income from a job; there is an option available that might save tax. Bruce can change the tax file status from joint to individual tax filing. There were certain benefits under the individual filing status thus; there will be less tax payable for the year.

It can be argued that both should still file the return under joint filing and despite Alice’s unemployment, as there will be more deductions available to them. With less income and more deductions, there will be less taxable income and less tax expense.

The medical premiums have been increased in this year and thus, this will reduce the tax as well. Moreover, there is an increase in medical expenditure since Alice is ill and will need to get treated. As per the law, the dental and medical expense will be allowed, and it will be valued at an amount exceeding 7.5% of the gross income. This is because Alice, who is a spouse, is older than 65.

Moreover, Bruce should make an investment in the bonds that are issued by state and are to be used by the federal government. This way, the interest income from those bonds will be exempt from tax. The gross income will not include the taxable income from investment and it will reduce tax liability.

They can save tax through various ways and can qualify for the tax saving legal sections, which were passed by the local government. As Alice is ill and there is no alternate source of income for Alice; in that situation, further tax deduction on the submission of the joint file could cause further difficulties in spending a life.

 If Alice wants to qualify for the beneficial tax treatment, she should perform certain steps such as she could save tax by paying rent against HRA, which could provide a tax deduction to Alice and by doing so, she could save a significant amount for personal use or for medication purpose.

In addition to this, she could adopt the policy of postponing the deductible expenditures that will also provide tax savings and she could follow this policy during the time of her illness, and she could go for such expenses after her recovery. Moreover, she could charge frequent expenses that she would usually pay early next year on credit cards by doing so, she could claim deductions even though the bills against her credit card won’t actually be paid until next year.

By taking the advantage of the time difference in incurring the expense and the time of tax filing, she could save a significant amount in form of tax savings. Furthermore, she could pay expense through checks and mail the details about the expense few days before the year end. By doing so, she could fall into the category in which tax law says, “Anyone could withhold the expenses in the year in which he mails the checks; instead of the fact, that he or she will not be deposited or cashed until the start of the next year.”........................

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