Alfred E. Old and Beulah A. Crane, each age 42, married on September 7, 2014. Al
ID: 3197085 • Letter: A
Question
Alfred E. Old and Beulah A. Crane, each age 42, married on September 7, 2014. Alfred and Beulah will file a joint return for 2016. Alfred's Social Security number is 111-11-1112. Beulah's Social Security number is 123-45-6789, and she adopted "Old" as her married name. They live at 211 Brickstone Drive, Atlanta, GA 30304.
Alfred was divorced from Sarah Old in March 2014. Under the divorce agreement, Alfred is to pay Sarah $1,250 per month for the next 10 years or until Sarah's death, whichever occurs first. Alfred pays Sarah $15,000 in 2016. In addition, in January 2016, Alfred pays Sarah $50,000, which is designated as being for her share of the marital property. Also, Alfred is responsible for all prior years' income taxes. Sarah's Social Security number is 123-45-6788.
Alfred's salary for 2016 is $150,000, and his employer, Cherry, Inc. (Federal I.D. No. 98-7654321), provides him with group term life insurance equal to twice his annual salary. His employer withheld $24,900 for Federal income taxes and $8,000 for state income taxes. The proper amounts were withheld for FICA taxes.
Beulah recently graduated from law school and is employed by Legal Aid Society, Inc. (Federal I.D. No. 11-1111111), as a public defender. She receives a salary of $40,000 in 2016. Her employer withheld $7,500 for Federal income taxes and $2,400 for state income taxes. The proper amounts were withheld for FICA taxes.
Beulah has $2,500 in qualified dividends on Yellow Corporation stock she inherited. Alfred and Beulah receive a $1,900 refund on their 2015 state income taxes. They itemized deductions on their 2015 Federal income tax return (total of $15,000). Alfred and Beulah pay $4,500 interest and $1,450 property taxes on their personal residence in 2016. Their charitable contributions total $2,400 (all to their church). They paid sales taxes of $1,400, for which they maintain the receipts. Both spouses had health insurance for all months of 2016 and do not want to contribute to the Presidential Election Campaign.
Required:
Compute the Olds' net tax payable (or refund due) for 2016. Use Form 1040 and Schedule A, Schedule B and the Qualified Dividends and Capital Gain Tax Worksheet to complete this tax return.
It may be necessary to complete the tax schedules before completing Form 1040.
Enter all amounts as positive numbers.
If an amount box does not require an entry or the answer is zero, enter "0".
Make realistic assumptions about any missing data.
When computing the tax liability, do not round your immediate calculations. If required round your final answers to the nearest dollar.
Use the 2016 Tax Rate Schedule provided. Do not use the Tax Tables.
Complete Olds' Schedule B for 2016.
2016
Attachment
Sequence No. 08
(Form 1040A or 1040)
Department of the Treasury Internal Revenue Service (99) Interest and Ordinary Dividends
Attach to Form 1040A or 1040.
Information about Schedule B and its instructions is at www.irs.gov/scheduleb. OMB No. 1545-0074
2016
Attachment
Sequence No. 08
ALFRED E OLD Your social security number
111-11-1112 Part I
Interest
(See instructions on back and the instructions for Form 1040A, or Form 1040, line 8a.)
Note. If you received a Form 1099-INT, Form 1099-OID, or substitute statement from a brokerage firm, list the firm's name as the payer and enter the total interest shown on that form. 1 List name of payer. If any interest is from a seller-financed mortgage and the buyer used the property as a personal residence, see instructions on back and list this interest first. Also, show that buyer's social security number and address Amount 1 2 Add the amounts on line 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 3 Excludable interest on series EE and I U.S. savings bonds issued after 1989. Attach Form 8815 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3 4 Subtract line 3 from line 2. Enter the result here and on Form 1040A, or Form 1040, line 8a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4 Note. If line 4 is over $1,500, you must complete Part III. Amount Part II
Ordinary
Dividends
(See instructions on back and the instructions for Form 1040A, or Form 1040, line 9a.)
Note. If you received a Form 1099-DIV or substitute statement from a brokerage firm, list the firm's name as the payer and enter the ordinary dividends shown on that form. 5 List name of payer _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 5 6 Add the amounts on line 5. Enter the total here and on Form 1040A, or Form 1040, line 9a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Note. If line 6 is over $1,500, you must complete Part III. You must complete this part if you (a) had over $1,500 of taxable interest or ordinary dividends; (b) had a foreign account; or (c) received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
Yes
No Part III
Foreign
Accounts
and Trusts
(See
instructions.) 7a At any time during 2016, did you have a financial interest in or signature authority over a financial account (such as a bank account, securities account, or brokerage account) located in a foreign country? See instructions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . X If "Yes," are you required to file FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), to report that financial interest or signature authority? See FinCEN Form 114 and its instructions for filing requirements and exceptions to those requirements . . . . . . . . . . . . . . . . . . b If you are required to file FinCEN Form 114, enter the name of the foreign country where the financial account is located _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 8 During 2016, did you receive a distribution from, or were you the grantor of, or transferor to, a foreign trust? If "Yes," you may have to file Form 3520. See instructions on back . . . . . . . . . . . . . X KIA For Paperwork Reduction Act Notice, see your tax return instructions. Schedule B (Form 1040A or 1040) 2016 2016 Tax Rate Schedules Single-Schedule X If taxable income is of the amount over_ Head of household-Schedule Z If taxable income is: amount over_ The tax is: over_ 13250 50,400 130,150 210,800 413,350 441,000 0 $ 9,275 10% 9,275 37,650 $ 1,325.00+15% 6,897.50 + 25% 26,835.00 28% 49,417.0033% 116,258.50 + 35% 125,936.0039.6% 13,250 50,400 130,150 210,800 413,350 441,000 37,650 $ 927.50 + 15% 5,183.75 25% 18,558.75 + 28% 46,278.75 33% 119,934.75 + 35% 9,275 37,650 91,150 190,150 413,350 120,529.75 39.6% 415,050 50,400 130,150 210,800 190,150 190,150 413,350 415,050 Married filing separately-Schedule Y-2 Married filing jointly or Qualifying widow(er)- Schedule Y-1 If taxable income is: If taxable income is: amount amount over_ The tax is: The tax is: over_ over_ $9,275 37,650 75,950 115,725 206,675 233475 0 18,550 ..10% $ $1,855.00 + 15% 10,367.50 + 25% 29,51 7.50 28% 51,791.50 + 33% 111,818.50 35% 130,578.50 + 39.6% 9,275 37,650 75,950 115,725 206,675 233,475 18,550 75,300 18,550 75,300 151,900 231450 413,350 466,950 75,300 151,900 $ 927.50 + 15% 5,183.75 25% 14,758.75 + 28% 25,895.7533% 55,909.25 + 35% 9,275 37,650 75,950 115,725 206,675 65,289.2539.6% 233,475 413350 466,950 466,950
Explanation / Answer
Gross Income-
Salary($150,000 + $40,000) - $190,000
Group Term Life Insurance(Note1) - $300
Dividends - $2,500
State Tax Refund(Note2) - $1900
Total Gross Income - $194,700
Deductions for Adjusted Gross Total Income-
Alimany Paid (Note3) - $15,000
Adjusted Gross Income - $179,700
Itemized Deductions-
State Income Taxes ($8,000 + $2,400) (Note4) - $10,400
Home Mortgage Interest - $4,500
Real Estate Taxes - $1,450
Cash Contributions - $2,400
Total - ($18,750)
Personal and Dependency Exemtions-
Exemtions- (4050 * 2) - ($8,100)
Taxable Income - $152,850
Tax on $152,850 (Note5) - $29,130
Less: Tax Withheld ($24,900 + $7,500) - ($32,400)
Net Tax Payable (or refund due) for 2016 - ($3,270)
Notes:
1) Group Term Life Insurance Results in Gross Income for Alfred of $300 as follows:
{($300,000 - $50,000)/1000} * $ . 10 * 12 months = $300
2) Under the 111 tax benefit rule, Alfred and Beulah must include the $1900 state tax refund in their gross income. They received a tax benefit from the deduction in 2015.
3) The $15,000 is deductible alimony. The $50,000 payment is a property settlement and is not deductible by Alfred.
4) The State Income Taxes paid of $10,400 exceed the sale taxes paid of $1,400.
5) The Tax Liability on taxable income of $152,850 is calculated using the Tax Rate Schedule for married filing jointly (applying the 15% rate for the qualified dividends of $2,500) and the amount is determined as follows:
Tax on divided income ($2,500 * 15%) - $375
Tax on remainder of $150,350 ($150,850 - $2,500) using the Tax Rate Schedule - $29,130
Total - $29,530
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