Concepts in Federal Taxation 21ed (2014)

Chapter 8 Problem 98 .

Please answer both a & b.

Here are some target amounts for the answer

Total gross income $91,412

AGI $84,791

Total itemized deductions -$16,456

Personal exemptions -$7,800

Tax refund -$696

In integrative problem 86 in Chapter 4, you were asked to calculate Carmins gross

income for 2013. This is the second phase, which provides the additional information

necessary for you to calculate her taxable income, income tax liability, and

additional tax (or refund due). NOTE: The gross income items from problem 86

still apply. However, some additional items might affect the amount of gross

income that Carmin must report. That is, several items included in the gross

income from integrative problem 86 are either not reported as gross income or

need to be combined with the additional information in this problem to determine

the correct treatment. Therefore, you should make the appropriate adjustments to

gross income in integrative problem 86, and begin your tax calculation under the

heading of Gross Income from Problem 86, As Adjusted.

From this point on, any items of gross income from the information in this

problem should be listed to determine gross income for tax purposes. You do not

need to list all the individual gross income items from integrative problem 86 in

your solution. However, you should explain the adjustments made to the phase 1

gross income figure as part of your discussion of the solution.

Carmin has the following amounts withheld from her paycheck for the payment

of state income taxes, federal taxes, and Social Security taxes:

State income taxes $4,768

Federal income taxes 9,723

Social Security taxes 6,120

In addition, Carmin makes timely federal estimated tax payments of $400 per

quarter and estimated state tax payments of $150 per quarter. To minimize her tax

liability, she makes her last estimated state tax payment on December 31, 2013.

Because of her busy work schedule, Carmin is unable to give her accountant

the tax documents necessary for filing her 2012 state and federal income tax return

by the due date (April 15, 2013). In filing her extension on April 15, 2013, she

makes a state tax payment of $245 and a federal tax payment of $750. Her return

is eventually filed on June 25, 2013. In August 2013, she receives a federal refund

of $180 and a state tax refund of $60.

Carmin pays $1,980 in real estate taxes on her principal residence. The real

estate tax is used to pay for town schools and other municipal services. The town

also has 5 fire districts, which levy a separate tax (i.e., fire tax) to fund each districts

fire department. The fire tax is based on the assessed value of the taxpayers home.

Carmin pays $170 in fire tax during the year.

Carmin drives a 2012 Tarago 919 Wagon. Her car registration costs $50 and

covers the period 1/1/13 through 12/31/13. In addition, she pays $280 in property

tax to the town, based on the book value of the car.

In addition to the medical costs presented in problem 85 in Chapter 4, Carmin

incurs the following unreimbursed medical costs:

Dentist $310

Doctor 390

Prescription drugs 215

Over-the-counter drugs 140

Optometrist 125

Emergency room charges 440

Chiropractor 265

On March 1, Carmin takes advantage of low interest rates and refinances her

$75,000 home mortgage. The new home loan is for 15 years. Carmin and her exhusband

paid $90,000 for the house in 2002. The house is worth $155,000. She

pays $215 in closing costs and $1,800 in points to obtain the loan. As part of the

refinancing arrangement, she also obtains a $10,000 home equity loan. She uses

the proceeds from the home equity loan to remodel the kitchen and bathroom and

to reduce the balances on her credit cards. Her home mortgage interest for the

year is $6,500, and her home equity loan interest is $850. She incurs interest on

her Chargit credit card of $410 and $88 on her Myers Department Store card.

The interest on her car loan from Tarago Financing Corporation is $350.

Carmin receives the following information on her investment in Grubstake

Mining and Development:

Ordinary income $7,400

Short-term capital gain 300

Long-term capital loss 5,200

Charitable contribution 500

In May 2013, she contributes clothing to the Salvation Army. The original cost

of the clothing was $740. She receives a statement from the Salvation Army valuing

the donation at $360. In addition, she makes the following cash contributions:

Larkin College $850

United Way 125

First Methodist Church 790

Amos House (homeless shelter) 200

Kappa Delta Delta Sorority 150

Local Chamber of Commerce 100

Carmin sells real estate in the evenings and on weekends. She runs the business

from a 600-square-foot office in her basement. She has been operating in a businesslike

way since April 2004 and has always shown a profit. She has the following

income and expenses from her business: Commissions $24,230

Advertising 4,300

Telephone 550

Real estate license 160

Carmin has a separate telephone line to her office. The $550 telephone cost

includes a $30 monthly fee and $190 in long-distance calls related to her business.

Carmin uses her car in her business and properly documents 8,000 businessrelated

miles. The business and personal use of her car during the year total 20,000

miles. In 2012, Carmin elected to use the standard mileage method to calculate

her car expenses. She spends $85 on tolls and $225 on parking related to her real

estate business.

Carmin incurs the following expenses in operating her home:

Water $ 205

Electricity 980

Gas 630

Insurance 1,470

The living area of Carmins house (not including the basement) measures

2,400 square feet. When she started her business in April 2005, the fair market

value of the house was $100,000. Approximately 10% of the purchase price is attributable

to the land. Depreciation on the house (unallocated) for 2013 would be

$2,077.

In April, Carmins house is robbed. She apparently interrupted the burglar

because all thats missing is an antique brooch she inherited from her grandmother

and $300 in cash. Unfortunately, she didnt have a separate rider on her insurance

policy covering the jewelry. Therefore, the insurance company reimburses her only

$500 for the brooch. When her grandmother died in 2010, the fair market value

of the pin was $6,000. The fair market value of the pin at the date of the theft is

$7,500. Her insurance policy also limits to $100 the amount of cash that can be

claimed in a theft.

Carmins company has an accountable employee expense reimbursement plan

from which Carmin receives $10,800 for the following expenses:

Airfare $4,700

Hotels 3,400

Meals 2,000

Car rentals 600

Entertainment 900

Incidentals 400

During the year, she also pays $295 for business publications and $775 for a

local accountant to prepare her 2012 tax return. The bill from the accountant indicated

that preparation of the business portion of Carmins return cost $550.

In 2011, Carmin loaned $10,000 to her ex-husband Ray so he could start a

new business. Their loan agreement requires Ray to pay Carmin 8% interest on the

unpaid balance of the loan on December 31 of each year and to begin repaying the

loan in $2,500 annual installments on July 1, 2013. Carmin receives the interest

on the loan during 2011 and 2012. In March 2013, she receives a letter informing

her that Ray has filed for bankruptcy. On February 22, 2014, the bankruptcy court

awards all creditors 40% of their claims on Rays assets.

Calculate Carmins taxable income, income tax liability, and tax (or refund)

due on her 2013 tax return. Then do both of the following,

a. Include a brief explanation of how you determined each deduction and any item you did not treat as a deduction. Your solution to the problem should contain a list of each deduction and its amount, with the explanations attached.

b. Write a letter to Carmin explaining how you determined each deduction and any items you did not treat as a deduction. You should include a list of each deduction and its amount.