51. LO.5, 7, 10 B. J. and Carolyn Grace are full-time employees. B. J. is an elementary school teacher, and Carolyn is a registered nurse at a hospital. During the year, they incur the following employment-related expenses:

School supplies for use in the classroom $1,400 Emergency room uniforms 800 Union dues (teachers association) 200 Job hunting expenses (Carolyn obtained another nursing position but decided not to change jobs) 1,300 Continuing education correspondence courses

(required to maintain nursing license) 380 Professional dues and subscriptions 1,100 None of these expenses are reimbursed by the employers.

For the year, the Graces file a joint return reflecting salary income of $90,000. They also have gambling income of $6,000 and gambling losses of $7,000 (fully substantiated).

They pay $400 to have their tax return prepared. They have other itemized deductions

(i.e., interest on home mortgage, property taxes on personal residence, state income taxes, and charitable contributions) of $14,500. Determine the total amount of itemized deductions allowed to the Graces.

Annual rental $12,000 Utilities 3,600 Renter’s insurance 1,100 Janitorial service 1,200 The janitorial service is provided under a contract with the local agency of a national service. (Mason has no responsibility for payroll taxes as to the persons performing the service.) The renter’s insurance policy premium of $1,100 includes a $500 rider that specifically covers items (e.g., copier, computer, and office furniture) used in Mason’s business.
• On March 2, 2012, Mason purchased a new copier/printer for $550. At the same time, he purchased a file cabinet for $3,800. The cabinet is fireproof and has a sophisticated electronic security feature. Mason wants to write off these acquisitions as soon as possible. All of Mason’s other office furnishings are fully depreciated. Other expenditures in connection with the operation of the office are as follows:
Postal and delivery charges $260 Stationery and supplies 310 Telephone and conference calls 540 • Besides the items already noted, Mason had the following job-related expenses during 2012:
Airfare $5,600 Lodging 2,800 Meals 3,100 Entertainment 1,800 Taxis, limos 400 Business gifts (does not include shipping charge) 800 Most of the entertainment expense involved business lunches during which Mason was able to discuss company policy and resolve various local problems with the manager of the BYLO store he was visiting. The business gifts were $50 gift cards to a national steak house sent to 20 managers of the top-performing stores. The $50 cards (which cost Mason only $40) were mailed prior to Christmas, and for security purposes, a $5 per card shipping charge included certified mail delivery.
• Mason used his automobile (a 2011 Chevrolet Impala) for different purposes. The mileage driven during 2012 was as follows:
Mileage Allocation Purpose 1/1–6/30 7/1–12/31 Personal 2,000 2,100 Business 9,000 6,000 Mason has always used the automatic (standard) mileage method in accounting for his car usage for tax purposes. Parking and tolls in connection with business mileage were $420.
• Very distressed over his lack of pay increases and his career path, Mason looked into other employment opportunities during 2012. He contacted his college’s job placement service to obtain advice on securing a better position in the same field. This led to a cash outlay of $3,300 for travel, interviews, and biographical data. The results were disappointing. Nevertheless, he did receive one promising offer that he is considering.
The offer is described in Part 2 of this problem. For the time being, however, Mason remains an employee of BYLO.
• In addition to those previously discussed, the Hills had the following receipts during 2012:
Interest income—
Premier Credit Union (savings account) $1,900 Wells Fargo Bank certificate of deposit 900 City of Memphis (general purpose bonds) 1,700 $4,500 Federal income tax refund 1,000 Rental deposit refund—Cardinal Apartments 1,200 Manufacturer’s rebate 400 The income tax refund involved 2011 Federal taxes that they had overpaid. After several years of haggling, the Hills managed to recover the damage deposit they had made on the apartment they rented before moving to their current location. In 2011, when the Hills bought a new refrigerator/freezer for personal use, they received a mail-in coupon that provided a discount from the manufacturer. They received the $400 rebate in early February 2012.
• The Hills’ other expenditures for 2012 appear below.
Dental bills $3,500 State income tax 110 Interest paid on car loan 600 Contribution to mayor’s reelection campaign 50 Payment of annual church pledge 600 Premiums on life insurance 900 The dental bills were for crowns and bridges that Mason needed—the BYLO health insurance does not cover dental procedures. The state income tax was for $110 the Hills still owed when they filed their 2011 return in 2012. The insurance premiums were for a policy covering Mason’s life issued by Prudential Insurance Company, with Lily as the designated beneficiary.
Part 1—Tax Computation Using the appropriate forms and schedules, compute the Hills’s Federal income tax for 2012. Assume that the proper amount of Social Security and Medicare taxes were withheld.
Disregard the alternative minimum tax (AMT) as it is not discussed until Chapter 12 in the text. Income tax withholdings for 2012 were $6,800 (Federal) and $3,600 (State of Kentucky.) The Hills do not want to contribute to the Presidential Election Campaign Fund. Also, they want any overpayment of taxes refunded to them and not applied toward next year’s tax liability. Suggested software: H&R BLOCK At Home.
Part 2—Follow-Up Advice One of the offers Mason received during his job hunting efforts contained the following conditions:
• Annual salary of $65,000.
• No expense allowance, but the company will pay directly or reimburse for all employmentrelated expenses (including office in the home and business mileage but not any job hunting expenses).
• Mason must render an adequate accounting to the new employer as to the expenses involved, and any excess reimbursement must be returned.
Based on the job description he received, Mason estimates that the expenses involved in the new job will be comparable to those of his current position.
Although Mason is disappointed that the new salary is only $5,000 more than he currently receives, he has been told that some savings will occur due to the new expense account arrangement.
Mason requests your advice on this matter. Write a letter to him explaining how much he will benefit taxwise if he takes the new job. In making your comparison, assume that the 2012 tax rules apply (e.g., tax rates, amount of personal exemption, and standard deduction).