Fill out their problem on 2016 tax form such as 1040, schedule B,C,D

Appendix A Tax Return Problem - Part I Detailed Explanation 1. The amount on line 7 of the 1040, reflects Bill's wages of $152,272 and is from Exhibit A-1. 2. The interest income reported on Exhibits A-2 and A-3 is taxable. On the combined interest and dividend 1099 (Exhibit A-6) only the interest on the Ford Motor Bonds is taxable. The New York City Municipal Bonds and the New Jersey Economic Development Bonds are not taxable but are reported on line 8b of the 1040. a. The $144 withheld on the interest earned from the Ford Motor Bonds is added to the Schnappaufs federal withholdings (see # 6 below). b. Generally, the maturity value ($15,100) of a life insurance policy is not taxable. However, any interest earned ($380) on the maturity value of the policy is taxable interest. The amount Bill's father paid in premiums is not relevant. Bill can exclude the $15,100 from income, but must include the $380 of interest. Instructors Note: Bill received a 1099-INT from United Insurance (see Exhibit A9) for the accrued interest which is included on Schedule B. 3. The amount reported on Line 1a and 1b of the 1099-DIV (Exhibit A4 and A-5) and the amount of dividends reported on Exhibit A-6 are included in taxable income as qualified divdidends and taxed at 15%. For the Collingwood Capital Fund (Exhibit A4), the amount on Line 1a and 1b is also a qualified dividend that is reported on Schedule B and taxed at 15%. The amount on 2a is reported as a capital gain and is taxed at 15%. The $47 of federal tax withheld on the dividends/capital gains from the Collingwood Capital Fund is added to the Schnappaufs federal withholdings (see # 6 below). 4. Under the tax benefit rule, the Schnappaufs state income tax refund of $818 is taxable. A federal tax refund is never taxed. Rather, it represents an over withholding of income tax from the prior period. 5. The Schnappaufs must include $7,345 as other income. This amount represents Bill's blackjack winnings of $6,200 from the Yardly Casino, a tablet ($595) and cash ($300) Joyce won as the lucky ninety-third caller, and the two $125 gift certificates she received from the PTO. a. Joyce should use the $595 amount for income tax purposes. This amount better represents what a willing buyer would pay a willing seller for the tablet. The manufacturer's suggested retail price is rarely, if ever, the price paid for an item. b. The $1,240 withheld on the gambling earnings from the Yardly Casino is added to the Schnappaufs federal withholdings (see # 6 below). 6. Their total federal withholdings for Phase I is $25,302. This represents Bill's federal withholding of $23,871 the $1,240 withheld on Bill's blackjack winnings, the $47 withheld on the income from the Collingwood Capital Fund and the $144 withheld on the interest from the Ford Motor Bonds. 7. Other information: a. The $1,500 of dividends paid to Joyce from the furniture restoration business she operates with her brother is not taxable. A dividend paid by a conduit entity (an S corporation) is not taxable, because it either represents a return of Joyce's initial investment or an amount that was taxable to Joyce in a previous year. The $1,500 reduces Joyce's basis (i.e., investment) in the business. b. If the student is using tax preparation software, the Schnappaufs will use the standard deduction of $12,600. Both Will and Dan are older than 17 years of age and are not eligible for the child tax credit. Although Tom is eligible for the $1,000 child tax credit because their AGI exceeds $130,000 the tax credit is completely phased out. c. If the student is using tax preparation software, the computer will compute the tax liability by taxing the capital gain income of $105 and dividend income of $2,253 at 15%. The Schnappaufs remaining taxable income is taxed at 25% (see Capital Gain Tax Worksheet). Phase I - 2 Appendix A Tax Return Problem - Part II Detailed Explanation 1. Joyce will report $10,453 of income from her business. a. Joyce will report $26,620 of income of which $22,620 is from the 1099-MISC (see Exhibits A-10 to A-12) and $4,000 is an advance from the publisher. The advance is taxable to Joyce because she has a claim or right to the advance. The royalties are from Joyce's trade or business and do not have to be reported on Schedule E. b. Because this is the first year she has owned the Volster, Joyce must decide whether to use the standard mileage rate or her actual expenses. If Joyce uses the standard mileage rate, 4,860 (10,800 x 45%) of her miles are eligble for the deduction. The standard mileage rate provides a deduction of $2,795 (57.5 cents x 4,860 miles). As a self-employed taxpayer, Joyce can add to the standard mileage rate the business portion of the personal property taxes on the car $234 ($520 x 45%) and the business portion of the interest expense on her car loan $114 ($252 x 45%). The standard mileage rate method and her total deduction for car expenses is $2,736 ($2,795 + $234 + $114). Joyce should use the standard deduction because it yields a greater deduction than using actual expenses ($3,143 versus $2,436 - see car and truck worksheet). Although Tax Cut includes the interest and property taxes from the car as part of car and truck expenses these items could have been reported separately on Schedule C. c. Joyce can claim a home office deduction because the room is used exclusively for her business. d. 1. Her business use of the house is 15% (375 office square ft. 2,500 total square ft.). The first step in determining the basis of Joyce's home office is to determine the basis of the home. This is obtained by reducing the purchase price of the property ($70,000) by the value of the land $7,000 ($70,000 x 10%). The portion of the basis attributable to her home office ($9,450) is determined by multiplying the basis of the house $63,000 ($70,000 - $7,000) by Joyce's business use percentage of 15%. Joyce's depreciation deduction is $242 ($9,450 x .02564). 2. Joyce can deduct the business use percentage (15%) of the indirect expenses. Her indirect expenses include home mortgage interest ($8,140), real estate taxes ($11,200), heat ($2,170), insurance ($1,480), cleaning ($1,560) and electricity ($740). Because the kitchen repairs do not relate to her home office, no portion of the expense is deductible. She can deduct $1,218 ($8,140 x 15%) of the home mortgage, $1,680 ($11,200 x 15%) of the real estate taxes and $893 ($5,950 x 15%) of the other indirect expenses. Note: The personal portion of interest and real estate expenses are deducted on Schedule A [see # 3 (b) (1) and 3 (c) below]. All of Joyce's other business expenses are deductible in full except for meals, which must be reduced by 50%. Her deduction for meals is $305 ($610 x 50%). Her travel of $4,445 consists of train tickets ($535), airfare ($1,670), and lodging ($2,240). e. Note: The students might place some of the expenses listed on Schedule C of the tax return solution on different lines. For example, the postage on line 27a, other expense, could be listed as part of office expense on line 18. Therefore, this should be viewed as one acceptable method for preparing Schedule C. 2. Joyce is self-employed and must pay self-employment tax on her net earnings from self-employment. She is allowed to deduct 1/2 of the self-employment tax paid as a deduction for adjusted gross income. This results in only 92.35% of the selfemployment income subject to the tax. Joyce's self-employment tax is $1,477 [($10,453 x 92.35%) x 15.3%] and her deduction on line 27 of the 1040 is $739 ($1,477 x 50%). 3. The Schnappaufs total itemized deductions for the year are $43,826. The following is an explanation of each component of their itemized deductions. a. Medical Expenses The Schnappaufs can use all of their medical expenses except for the $175 for over-the-counter medicine and the vet fees of $350 for their dog Sandy in computing their medical expense deduction. Because their medical expenses of $7,890 (net of the $700 reimbursement) are less than $16,803 (10% x $168,032), they cannot deduct any of their medical expenses. Instructor's Note: Some students might argue that the cost of the Exsoaligner is a deductible expense, because it was recommended by Bill's chiropractor to help strengthen his back. That argument has some merit. However, including the Exsoaligner as a deductible medical expenses will not increase their medical expenses over the 10% of AGI threshold. b. c. Taxes Bill and Joyce can deduct a total of $16,463 in taxes for the year. deductible amount of the taxes is described below. The 1. The state income taxes of $5,577 withheld from Bill's salary and Joyce's quarterly estimated tax payments of $600 ($150 x 4 quarter) to the State of Rhode Island are deductible. Their state tax deduction is $6,177. The Schnappaufs can deduct only 85% of their real estate taxes on Schedule A because the other 15% relates to Joyce's home office [see # 1(c)(2) above]. Their deduction for real estate taxes is $9,520 ($11,200 x 85%). 2. The personal property tax paid on their cars is deductible, because the tax is based on the value (ad valorem) of the car. Because Joyce uses the car 40% for business, only $286 ($520 x 55%) of the tax is deductible on Schedule A [see # 1(b) above]. The Schnappaufs can deduct $766 ($480 + $286) in personal property taxes. Interest The Schnappaufs can deduct a total of $12,019 of interest for the year. The Schnappaufs can deduct only 85% of their home mortgage interest of $8,140 on Schedule A, because the other 15% relates to Joyce's home office [see # 1(c)(2) above]. Their deduction is $6,919 ($8,140 x 85%). They also can deduct the interest on the home equity loan of $5,100 (see Exhibit A-14). Phase II - 2 d. Charitable Contributions The Schnappaufs gave a total of $8,980 to charitable organizations during the year. The cash contributions of $8,210 were given to Christ the King ($3,100), United Fund ($2,700), Adelaide University ($510) and Tremon University ($1,900) and are assumed to be made throughout the course of the year and are not subject to the special reporting rules for individual cash contributions in excess of $250. The antique table donated to the United Way is considered capital gain property and is valued at its fair market value ($410). The other property donated to the United Way would produce a personal loss if sold and are valued at the lower of fair market value or adjusted basis. Form 8283 is required because the total value of the property exceeds $500. e. Casualty Loss The Schnappaufs do not receive a tax deduction for the four items damaged in Hurricane Ann, because 10% their adjusted gross income $16,803 ($168,032 x 10%) is greater than their unreimbursed casualty loss of $2,410. Instructors Note: Form 4684 is not required to be filed by the Schnappaufs, but is provided in the solution so that the instructor can check whether each student properly calculated the amount of loss or gain on the damaged property. f. Miscellaneous Deductions The Schnappaufs are entitled to a deduction for their miscellaneous itemized deductions of $2,914. This is the amount that is greater than 2% of their adjusted gross income [$6,275 - $3,361 ($168,032 x .02)]. They also can deduct their $3,450 of gambling losses. The miscellaneous deductions include Bill's education expenses of $3,310 that could not be deducted for AGI or qualify for an education tax credit. The breakdown of their miscellaneous itemized deductions is found on statements accompanying the tax return solution. 4. Both Bill and Joyce can make contributions to their IRA accounts, but only Joyce can deduct her contribution for adjusted gross income. The amount Bill contributed to the individual retirement accounts is not deductible, because Bill participates in USC's pension plan and their adjusted gross income exceeds $118,000. Joyce's contribution is deductible because she is self-employed, does not have another pension plan, and their adjusted gross income is less than $183,000. Bill must file a Form 8606 for the amount contributed to his IRA account. 5. They an American Opportunity Tax Credit of $2,990 for Will and Dan's education expenses. The $5,000 tax credit is phased out by 10% since their AGI exceeds $160,000 and appears as a tax credit of $1,794 on line 50 and as a tax payment of $1,196 (the refundable amount) on line 68. Bill is not entitled to a Lifetime Learning Tax Credit and cannot be deducted for AGI since their AGI exceeds $160,000. The expenses can be deducted from AGI as a miscellaneous deduction and are included above in #3f. Phase II - 3 6. Their total federal withholdings from Phase I is $25,302. This represents Bill's federal withholding of $23,871, the $1,240 withheld on Bill's blackjack winnings, the $47 withheld on the income from the Collingwood Capital Fund and the $144 withheld on the interest from the Ford Motor Bonds. In addition, Joyce's made quarterly estimated tax payments of $840 ($210 x 4 quarters) and is shown on line 65. For reporting purposes, 40% of the $2,990 American Opportunity Tax Credit is refundable, so $1,196 ($2,990 x 40%) of the credit is considered a federal tax payment. Their total federal tax payments are $27,338 ($25,302 + $840 + $1,196). 7. The Schnappauf's income tax liability of $17,414 but is reduced to $15,620 by the non-refundable portion ($1,794) of the $2,990 American Opportunity Tax Credit. Although Tom is eligble for the child tax credit, Bill and Joyce cannot claim the credit because their adjusted gross income exceeds $130,000. Their tax liability is increased by Joyce's self-employment tax of $1,477 and their total tax liability for the year is $17,097. If Part III is not done, the Schnappauf's will receive a refund of $10,241. Phase II - 4