from South Western Individual income Tax 2016 vol 39 Chapter 4, problem 58 58. D
ID: 2421527 • Letter: F
Question
from South Western Individual income Tax 2016 vol 39
Chapter 4, problem 58
58. Daniel B. Butler and Freida C. Butler, husband and wife, file a joint return. The Butlers live at 625 Oak Street in Corbin, KY 40707. Dan’s SSN is 111-11-1111, and Fredia’s is 123-45-6789. Dan was born on 01/15/1964. Frieda was born on August 20, 1965.
During 2014 Dan and Freida furnished over half of the total support of each of the following individuals, all of whom still live at home:
Gina, their daughter 22 a full time student who married on 12/21/14 has no income of her own and for 2014 did not file a joint return with her husband Casey, who earned $10,600.00 during 2014. Gina’s SSN is 123-45-6788
Sam their son is 20 who had a gross income of 6300 in 2014 dropped out of college in October 2014. He had graduated high school in May 2014. Sam’s SSN is 123-45-6787.
Ben their oldest son age 26 is a full time graduate student with gross income of 5200. Ben’s SSN is 123-45-6786
Dan was employed as a manager by WJJJ, Inc. EIN # 11-11111111, 604 Franklin Street Corbin KY 40702, and Freida was employed as a salesperson for Corbin Realty KY 40701. Selected information from the W-2 forms provided by the employers is presented below. Dan and Freida use the cash method.
Line Description Dan Freida
1 Wages,tips, other compensation 74,000 86,000
2 Federal income tax withheld 11,000 12,400
17 State income tax withheld 2,960 3,440
Freida sold a house on 12/30/14 and will be paid a commission of $3100(not included in the 86k reported on W-2) on the January 10, 2015 closing date.
Other income (as reported on 1099 forms) for 2014 consisted of the following:
Dividends on CSX stock (qualified) $4,200
Interest on savings at Second Bank 1,600
Interest on City of Corbin bonds 900
Interest on First Bank CD 382
The 382 from First Bank was original issue discount. Dan and Freida collected 16k on the First Bank CD that matured on 09/30/14. The CD was purchased on 10/1/12 for $14,995.00 and the yield to maturity was 3.3%
Dan received a Schedule K-1 from Falcon Partnership which showed his distribution share of income as $7,000.00. In addition to the above information, Dan and Freida’s itemized deductions included the following:
Paid on 2014 Kentucky income tax 700.00
Personal property tax paid 600.00
Real estate taxes paid 1,800.00
Interest on home mortgage (Corbin S&L) 4,900.00
Cash contributions to the Boy Scouts 800.00
Sales tax from the sales tax table is $1,860. Dan and Freida made estimated tax payments of $8000.00. The Kentucky income tax rate is 4%.
Part 1- Tax Computation
Compute Dan and Freida’s 2014 income tax payable (or refund due) If you use tax forms for the computations you will need Form 1040 and Schedules A, B and E. Suggested software H&R BLOCK Tax software
Part 2 Tax Planning
Dan plans to reduce his work schedule and only work half time for WJJJ in 2015. He has been writing songs for several years and wants to devote his time to developing a career as a songwriter. Because of the uncertainty in the music business, however, he would like you to make all computations assuming that he will have no income from song writing in 2015. To make up for the loss of income Freida plans to increase the amount of time she spends selling real estate. She estimates that she will be able to earn $90k in 2015. Assume that all other income and expense items will be approximately the same as they were for 2014. Assume that Sam will be in enrolled in college as a full time student for the summer and fall semesters. Will the Butlers have more or less disposable income (after Federal income tax) in 2015? Write a letter to the Butlers that contains your advice and prepare a memo for the tax files.
Explanation / Answer
Ans:
Part 1—Tax Computation Gross income Salary and commissions ($86,000 + $65,000) (Note 1) $151,000 Interest income on certificate of deposit (Note 2) $383 Interest income on Second Bank savings account (Note 3) $1,600 Dividends on CSX stock (Note 4) $3,500 Income from partnership (Note 5) $9,000 Deductions for adjusted gross income $0 Adjusted gross income $165,483 Itemized deductions State income tax (Note 6) $6,000 Personal property tax $600 Real estate tax $1,800 Home mortgage interest $4,900 Cash contributions $975 -$14,275 Personal and dependency exemptions (Note 7) -$14,600 Taxable income $136,608 Tax on taxable income other than dividends $133,108; [$9,363 + 25% x ($133,108 -$68,000)] $25,640 Tax on dividend income ($3,500 X 15%) $525 Less: Tax withheld by employers ($12,000 + $11,400) -$23,400 Estimated tax payments -$8,000 Making Work Pay credit (Note 8) -$490 Net tax payable (or refund due) for 2011 -$5,725 Notes (1) The $3,100 commission for Freida is not included in her gross income until it is received in 2010. (2) The original interest discount rules apply. The OID for 2010 is $383. Maturity Value 15000 2008 OID ($14,000 x 3.5%) X 3/12 123 2009 OID ($14,123 x 3.5%) 494 Adjusted basis at beginning of 2009 ($14,123 + $494) -14617 2010 OID 383 (3) The $900 of interest on the City of Corbin bonds is excluded from gross income. (4) The dividends of $3,500 on the CSX stock are included in Dan and Freidas gross income. (5) Dans share of the partnership profits is $9,000 (per the Schedule K-1 received). Therefore, he must include this amount in his gross income. (6) The state income tax paid of $6,000 ($2,700 + $2,900 + $400) exceeded the sales tax of $1,860 from the sales tax table. (7) Gina qualifies as a dependent. Under the qualifying child requirements, she does not have to satisfy the gross income test. In any event, this is not a problem since Gina has $0 gross income. Gina does not file a joint return with her husband. Therefore, since all of the requirements are satisfied for a qualifying child, Dan and Freida can claim a dependency deduction for Gina. Ben, their son, fails to qualify as a dependent because of the age requirement for a qualifying child and because of the gross income test for a qualifying relative. Sam, their son, does qualify as a dependent as a qualifying child. It appears he has too much gross income ($6,300). However, there is no gross income test under the qualifying child requirements. He does satisfy the qualifying child age requirement by being a full-time student during five calendar months. Therefore, Dan and Freidas personal exemption and dependency deductions are $14,600 ($3,650 x 4). (8) The Making Work Pay credit is calculated as follows: Earned income ($86,000 + $65,000) $151,000 Rate = Tentative MWP credit $151,000 x 6.20% $9,362 Maximum MWP credit Phaseout: $800 Modified AGI Threshold ($165,483 - 150,000 $15,483 Excess Phaseout rate = 2% Phaseout = $310 Making Work Pay credit $490 A refundable tax credit against income tax in an amount equal to the lesser of 6.2% of the individual’s earned income or $400 ($800 for married couples filing jointly). Phased out for individual’s with AGI in excess of $75,000 ($150,000 if filing jointly).Related Questions
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