COMPREHENSIVE TAX RETURN PROBLEMS
- Part 1—Tax Computation
Gross income:
Salary $65,000
Interest income ($1,300 + $400) 1,700
Dividend income ($800 + $750 + $650) 2,200
State income tax refund 1,100
Business income (Note 1) 19,800
Net STCG (Note 2) 1,200
Total gross income $91,000
Deductions for AGI:
Business expenses (Note 1) (16,750)
Self-employment tax deduction (Note 3) (216)
Adjusted gross income $74,034
Deductions from AGI:
Itemized deductions (Note 4) (9,834)
Personal exemption (3,950)
Taxable income $60,250
Income tax (Note 5) $10,705
Self-employment tax (Note 3) 431
Total tax $11,136
Taxes withheld (10,500)
Estimated taxes (1,000)
Net tax payable (or refund due) for 2014 ($ 364)
See the tax return solution beginning on p. 11-16 of the Solutions Manual.
Notes
(1) Business receipts
Part-time tax practice revenues $ 3,800
Software writing business royalties 16,000
Total gross income $19,800
Business expenses
Part-time tax practice processing fees $ 600
Software writing business ($7,000 + $2,000 + $3,000 +
$650 + $3,500) 16,150
Total business expenses (deducted for AGI) $16,750
(2) Gray stock ($7,000 − $8,800) STCL ($ 1,800)
Utility vehicle ($6,500 − $6,000) STCG 500
Blue stock ($5,500 − $3,000) STCG 2,500
Net STCG $ 1,200
(3) Beth’s earnings from self-employment during 2014 were $3,050 ($19,800 − $16,750), and the self-employment tax on this amount is computed as follows.
Social Security Medicare
Portion Portion
Ceiling amount $117,000
Less: FICA wages (65,000)
Net ceiling $ 52,000
Net self-employment income ($3,050 × 92.35%) $ 2,817 $2,817
Lesser of net ceiling or net self-employment income* $ 2,817 $2,817
Tax rate × 12.4% × 2.9%
Self-employment tax $ 349 $ 82
Total self-employment tax $431
Beth’s for AGI self-employment tax deduction is $216 ($431 × 50%).
*All of Beth’s net self-employment earnings are subject to both portions of the self-employment tax.
(4) Medical expenses [($300 + $2,875) − (10% × $74,034)] $ –0–
Taxes ($1,954 + $1,766) 3,720
Home mortgage interest 3,845
Charitable contributions ($1,560 + $520) 2,080
Miscellaneous itemized deductions
Professional dues and subscriptions $ 350
Convention expenses, excluding meals 1,220
Meals ($200 × 50%) 100
$1,670
Less: 2% of AGI ($74,034 × 2%) (1,481) 189
Itemized deductions $9,834
(5) Tax on taxable income of $60,250
Tax on dividend income ($2,200 × 15%) $ 330
Tax from Tax Table on remaining taxable
income of $58,050 ($60,250 − $2,200) 10,375
Total income tax $10,705
Part 2—Tax Planning
Gross income:
Salary $65,000
Interest income ($1,300 + $400) 1,700
Dividend income ($800 + $750 + $650) 2,200
State income tax refund 1,100
Net STCG 1,200
Total gross income $71,200
Deductions for AGI (–0–)
Adjusted gross income $71,200
Itemized deductions
Medical expenses
[($300 + $2,875) − (10% × $71,200)] $ –0–
Taxes ($1,954 + $1,766) 3,720
Home mortgage interest 3,845
Charitable contributions ($1,560 + $520) 2,080
Miscellaneous itemized deductions
Professional dues and subscriptions $ 350
Convention expenses, excluding meals 1,220
Meals ($200 × 50%) 100
$1,670
Less: 2% of AGI ($71,200 × 2%) (1,424) 246
Total itemized deductions (9,891)
Personal exemptions ($4,000 × 2) (8,000)
Taxable income $53,309
Income tax for 2015 (based on the head-of-household rate
schedule) (Note 1) $ 7,430
Less: Child tax credit $1,000
Credit for child and dependent care expenditures ($3,000 × 20%) 600
Adoption expenses credit 2,000 (3,600)
Less: Income taxes withheld (10,500)
Net tax payable (or refund due) for 2015 ($ 6,670)
With such a substantial refund due based on these assumptions, Beth should revise her Form W–4 so that a smaller amount of Federal income tax will be withheld from her salary in 2015.
Note
(1) Tax on $51,109 ($53,309 − $2,200) $7,100
Tax on $2,200 ($2,200 × 15%) 330
Total income tax $7,430
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